Penalties

Penalties can arise in many situations. If Tax Returns are late there can be fixed penalties and for delays in supplying information to HMRC penalties, including daily penalties, may become due.

The most substantial penalties relate to underpayments of tax. Enquiries under the various Codes of Practice such as COP 3, COP8, COP 9, COP 11 and COP 14 can give rise to tax related penalties; as can disclosures of errors in returns.

If a Tax Return was wrong and as a result tax was not paid then a penalty of up to 100% of the affected tax may become due. The maximum penalties are never sought by Inspectors and the actual amount depends on the precise circumstances. Skilled negotiation can make a difference to the amount eventually payable.

Penalties can arise if tax returns are incorrect because of negligence or fraud (old rules) or, under the new rules, because the error in a return was due to a lack of ‘reasonable care’, or was deliberate - such as intentionally sending incorrect information or was deliberate and concealed - such as intentionally sending incorrect information and taking steps to hide the error

But if reasonable care was taken to get things right, HMRC will not charge a penalty, even if the return was wrong.

The new rules apply for returns covered by a period that starts on or after 1 April 2008 and due to be returned after 1 April 2009. They apply to:

Income Tax
PAYE for employers and National Insurance contributions
CIS
VAT
Corporation Tax
Capital Gains Tax

The old rules were simpler and in particular VAT penalties were calculated differently from Income Tax penalties.

Under the rules for returns due before 1 April 2009 HMRC usually reduced the maximum penalty by factors which took into account the taxpayer’s disclosure of irregularities, cooperation with the enquiry and the seriousness of the case.

For returns due after 1 April 2009 HMRC say,

“If a penalty arises because of a lack of reasonable care, the level of the penalty will depend on the amount of the extra tax due and the reasons for the error.

If the error is careless, the penalty will be between 0 and 30% of the extra tax due.
If the error is deliberate, the penalty will be between 20 and 70% of the extra tax due.
If the error is deliberate and concealed, the penalty will be between 30 and 70% of the extra tax due.

The percentage of extra tax due that is charged as a penalty can be reduced if you tell HMRC about the error. Further reductions may also be made depending on the quality of the disclosure. 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”

HMRC hope that the change will encourage early disclosure of tax irregularities. As Inspectors will have less discretion than in the past it is possible the amount of penalties charged will increase. Penalty demands can be appealed.

An effect of the change is that both systems of penalties will run in tandem for many years. HMRC can, in some situations, get penalties going back 20 years so experience and knowledge of the two penalty systems will be necessary for at least that long.

Tax related penalties can be very substantial under both the old and new systems. It is essential that those potentially affected by them have expert advice on the rules and engage specialists with experience of negotiation with Inspectors.

Our approach is non judgmental and geared to achieving the best result for you as quickly as possible. While we aspire to a productive relationship with Inspectors of Taxes we will present your case vigorously and robustly. At all times you will be kept informed of developments and options for settlement will always be clearly explained to you.

We will:

advise on the penalties legally due
advise on the likely HMRC demand
advise on the scope for negotiation
advise on the merits of an appeal
conduct negotiations with HMRC
settle the issue

For further information please contact Iain Macleod on 0115 983 5580 or mobile 07920 146800 or email Iain at imacleod@edftax.co.uk