This is the final blog on a series of blogs on tax investigation. It covers penalties following a tax investigation. The other blogs covered Understand the Type of Tax Enquiry You Have, what triggers a tax inspection and tax inspection of your accounting records
Dealing With The Penalties
At the end of an enquiry or investigation, there may well be penalties to deal with.
Firstly, there is interest to pay but HMRC see this as just financial compensation for them not having use of the money from when it should have been payable and so is largely fair and at a reasonable interest rate.
However, penalties are also due. There is a new penalty regime for return periods starting on or after 1 April 2009 or where the due filing date is on or after 1 April 2009. In fact the new penalty system replaces all penalties for incorrect returns which lead to an underpayment of tax for income tax, corporation tax, PAYE, National Insurance and VAT.
Penalties under the new legislation are based on the potential lost revenue. The starting point for the maximum penalty depends on the behaviour that gave rise to the inaccuracy.
For unintentional errors…
- Mistakes made despite taking reasonable care – no penalty.
- Mistakes made where there is a lack of reasonable care (i.e. carelessness) – maximum penalty is 30% of the potential lost revenue.
For deliberate inaccuracies….
- For deliberate mis-statements – maximum penalty is 70% of the potential lost revenue.
- For deliberate mis-statements which are then concealed – maximum penalty of 100% of the potential lost revenue.
So the starting point involves an assessment of the behaviour that gave rise to the penalty. And what is reasonable care will vary from taxpayer to taxpayer and is judged on the circumstances and abilities of the individual.
The maximum penalties can be reduced based on the disclosure made by the taxpayer to the taxman. Where a disclosure is unprompted in that it is 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, the minimum penalties can be as follows…
- For careless errors – 0% (as opposed to 30%)
- For deliberate mis-statements – 20% (as opposed to 70%)
- For deliberate mis-statements which are then concealed – 30% (as opposed to 100%)
However where a disclosure is prompted as opposed to unprompted the minimum penalties are as follows…
- For careless errors – 15% (as opposed to 30%)
- For deliberate mis-statements – 35% (as opposed to 70%)
- For deliberate mis-statements which are then concealed – 50% (as opposed to 100%)
Please note that once an enquiry starts, it would be very rare for a disclosure to be unprompted if it is about something related to the enquiry.
How much the penalty is reduced from the maximum penalty to the minimum penalty is then based on the quality of the disclosure. The quality factors to consider are…
- Telling HMRC about it – up to 30% reduction
- Helping HMRC to quantify the inaccuracy – up to 40% reduction
- Giving HMRC access to the records to ensure inaccuracy is fully corrected – up to 30% reduction
So for example, someone with a prompted disclosure of a deliberate mis-statement with concealment can have the penalty reduced from 100% to 50%. If you score 25%, 15% and 30% on the above 3 items, this will give a 70% reduction of the 50% reduction which is 35%. i.e. the penalty will be 100% less 35% = 65%!
If the penalty arose because you failed to take reasonable care, HMRC can suspend the penalty for a period of time, a bit like a suspended sentence. As long as you behave during that time, the penalty will not then be payable.
The Old Penalties
Although the new regime is coming in based on return dates, there will still be penalties around under the old rules for some time. So these are summarised here.
The starting point is 100% of the tax underpaid. That’s an awful lot and another good reason to get your Tax Return right in the first place.
However, the penalties will be mitigated downwards according to certain factors as follows:
- Up to 40% discount relating to the amount of tax at stake.
- Up to 40% discount for the degree of co-operation of the taxpayer.
- Up to 20% discount for voluntary disclosure at an early stage.
In theory the penalty can go down to zero but this is rare. Something like a 10% to 30% penalty is more normal. If you disagree on the penalty, you can again make an appeal.