Understanding HMRC’s approach to penalty mitigation
29 September 2017
29 September 2017
Hanna Sandford, Consultant at Aspire Business Partnership LLP, discusses the benefits of being cooperative during HM Revenue and Custom (“HMRC”) enquiries wherever there is a possibility that the enquiry could result in penalties being issued.
When can HMRC issue penalties?
HMRC can issue penalties for any reason which results in tax being unpaid, understated or if a return or other document is returned late. A penalty may also be due if you do not inform HMRC that you are liable to pay a tax at the right time, or if HMRC raise an assessment which is too low and you do not inform them.
Below are the three main reasons which result in HMRC issuing penalties; -
1. Late filing or late payment
2. Inaccuracies on returns, payments or paperwork
If an individual or a company submits a document that contains a mistake or inaccuracy, HMRC will charge a penalty if the error is believed to be due to lack of “reasonable care”, a deliberate mistake, or if the error was deliberate and concealed.
Reasonable care refers to the expectation that a business or individual must keep records which allow them to provide accurate returns and/or documents to HMRC. The level of care which constitutes as reasonable differs according to the individual circumstance.
The penalty amount will be dictated by the reason which caused the error to occur and higher penalties will be issued if the reason is more serious i.e. if the error was deliberate and concealed you may be issued with the maximum penalty allowed by law.
3. Failure to notify
How do HMRC calculate penalties?
There are eight stages which HMRC complete in order to calculate the penalty due.
1. Establishing the potential lost revenue (PLR)
The penalty which is issued is a percentage of the PLR. The PLR is the amount which arises as a result of correcting an inaccuracy.
2. Determining the type of behaviour
The behaviour refers to the reason behind why the inaccuracy occurred. There are four different types of behaviour which are as follows;
3. Was the disclosure Prompted or Unprompted?
Once the behaviour has been established, HMRC will look to decide whether the disclosure was prompted or unprompted. A prompted disclosure is where you inform HMRC of an error following them opening a compliance check or if you believe they are about to identify the error. A disclosure is unprompted if it is made at a time when the person making it has no reason to believe that HMRC have discovered or are about the discover the inaccuracy.
4. Establishing the range which the penalty falls within
Following the completion of stages 1 to 3, the penalty will fall into one of 6 categories which are determined by the type of behaviour and whether the disclosure was prompted or unprompted and whether a penalty is due for an inaccuracy or a failure to notify.
Penalties for inaccuracies in returns/documents
Type of behaviour |
Unprompted disclosure |
Prompted disclosure |
Reasonable care |
No penalty |
No penalty |
Careless |
0% to 30% |
15% to 30% |
Deliberate |
20% to 70% |
35% to 70% |
Deliberate and concealed |
30% to 100% |
50% to 100% |
Penalties for failure to notify
Type of behaviour |
Unprompted or prompted disclosure |
Penalty range |
Non-deliberate |
Unprompted – within 12 months of tax being due |
0-30% |
Unprompted – 12 months or more after tax was due |
10% to 30% |
|
Prompted – within 12 months of tax being due |
10% to 30% |
|
Prompted – 12 months or more after tax was due |
20% to 30% |
|
Deliberate |
Unprompted |
20% to 70% |
Prompted |
35% to 70% |
|
Deliberate and concealed |
Unprompted |
30% to 100% |
Prompted |
50% to 100% |
If you have a reasonable excuse for a non-deliberate failure to notify, HMRC will not charge you a penalty.
5. Telling, Helping and Giving – The Quality of Disclosure
The Quality of Disclosure determines where the penalty will fall within the penalty range. Reductions are given based on the assistance that you provide HMRC. Dependent on the Quality of Disclosure, you could be entitled to reductions for the three following factors up to and including the amounts;
If you can prove and show that you have given a high-quality disclosure, i.e. you have complied with “telling, helping and giving”, then you will be entitled to a higher reduction. If you are not cooperative then you may still be entitled to a reduction but it will be of a lesser percentage.
6. Working out the penalty percentage rate
The penalty percentage rate is determined by the penalty range and the reductions allowed based on the quality of disclosure.
Case Study HMRC opened a compliance check into Bob’s 2014/15 tax return and found a careless inaccuracy which he had not notified HMRC of prior to them opening the compliance check, hence it was a prompted disclosure. HMRC informed the individual and they agreed with the inaccuracy. The penalty range for a careless inaccuracy with a prompted disclosure is 15% to 30% of the potential lost revenue (PLR). The reduction for the quality of disclosure was 25% for telling, 40% for helping and 30% for giving, equalling a total reduction of 95%.
|
7. The amount of the penalty
HMRC then work out the amount of the penalty by multiplying the PLR by the penalty percentage rate. For example, if the PLR in the example above was £3,000, the penalty would be £3,000 * 15.75% = £472.50.
8. Considering other reductions
If there are any other reductions which are due, for example, if a penalty has been issued on the same inaccuracy or tax previously, then a further reduction may be due. Once this has been established the final penalty amount will be charged.
Aspire Comment
Whilst we would hope that there are no inaccuracies in our midst that could lead to a HMRC compliance check – we are all human and mistakes do happen! Alternatively, if you are aware that you are not meeting a tax obligation required by your company then please do not leave it any longer and get in touch with Aspire.
The importance of being cooperative with HMRC is vital to ensure that penalties can be reduced by the highest possible amount. Aspire have a vast knowledge and experience in dealing with HMRC investigations and can assist you in dealing with and negotiating your penalty assessments.
If you have been issued with a tax and/or penalty assessment, or if a compliance check has been opened into your tax affairs, please give Aspire a call to discuss how we can help.
Email: enquire@aspirepartnership.co.uk
Phone: 0121 445 6178