Penalties in Enquiries

By | 2 August 2008

Inaccuracies in returns

A new penalty regime was introduced in FA 2007, and extended in FA 2008. It is expected to apply to inaccuracies in returns (or other documents) due to be filed from 1 April 2009, where the return (e.g. personal, company, VAT) relates to a tax period beginning on or after 1 April 2008 (e.g. self-assessment returns for individuals in respect of 2008/09 and later years).

‘Old’ regime

Penalties for incorrect tax returns submitted negligently (or fraudulently) under current legislation are tax-geared (i.e. based on potential lost revenue) and expressed as a percentage of the additional tax due. The maximum penalty is 100% of the culpable tax lost, but is subject to reductions, based on the following abatement factors as described in HMRC Leaflet IR160 (‘Enquiries Under Self-Assessment’):  

  • Disclosure – up to 20% (or exceptionally 30%);
  • Co-operation – up to 40%; and
  • Seriousness – up to 40%.

When negotiating the level of penalties with HMRC, it helps to know those factors that could result in penalty reductions. Penalties can often be negotiated down by reference to the guidance in HMRC’s Enquiry Manual. This outlines various circumstances to be taken into account in determining the level of abatement for disclosure (EM6070), co-operation (EM6075) and seriousness (EM6080).

New regime

There are fixed maximum and minimum penalties under the new regime (FA 2007, Sch 24 para 10), which depend on the following factors:

  • Behaviour, i.e. whether ‘reasonable care’ was taken (in which case no penalty is chargeable), or whether it was ‘careless’, ‘deliberate’ or ‘deliberate and concealed’.
  • Disclosure category, i.e. whether it was ‘prompted’ or ‘unprompted’; and
  • Disclosure quality, i.e. ‘telling’, ‘helping’ and ‘giving access’   

For example, the level of penalty for a prompted careless error is between 15 and 30 per cent, whereas a penalty for an unprompted careless error can be reduced from 30 to 0 per cent. When the maximum level of penalties is established under the first two bullet points, the reduction will depend on the quality of disclosure. HMRC’s guidance on penalty reductions for disclosure under the new regime is contained in the Compliance Handbook. This suggests (at CH82430) that the above three elements of disclosure may be weighted as follows:

  • Telling HMRC about the error (or failure to disclose) – 30 per cent;
  • Helping (i.e. giving HMRC reasonable help) – 40 per cent; and
  • Giving access to records – 30%

Similarities and differences

There are similarities between ‘disclosure’ under the old regime and ‘telling’ under the new one, and also between ‘co-operation’ and ‘helping’ and ‘giving access’ respectively. The current abatement factor of ‘seriousness’ does not feature in the new regime, which is unfortunate in some cases, e.g. those involving one-off, relatively small errors. The emphasis under the new regime seems to be on encouraging a proactive approach by clients (and agents) in resolving enquiries as quickly and efficiently as possible. For example:

  • HMRC state that, in the context of ‘telling’: “The person needs to show a positive approach to telling what has happened, not just reacting to questions” (CH82440);
  • ‘Helping’ includes “positive assistance as opposed to passive acceptance or obstruction” and “actively engaging in the work to accurately quantify the inaccuracies” (CH82450);
  • in HMRC’s view ‘giving access’ includes allowing access to “their business and other records” and their officers are advised that “…you should only seek access to records that are reasonably required for the purpose of ensuring that the document is corrected”. Whether HMRC consider that access should be provided to private account statements to secure the full disclosure reduction for this category remains to be seen.

The scope for negotiating penalties is generally restricted by maximum and minimum levels. It also seems likely that the level of penalty within those ranges will be difficult to predict, particularly in the early stages of the new regime, due to the numerous reduction factors involved, and also because those factors are relatively subjective in nature. Even though there is less scope and discretion to negotiate penalties, the scope that does exist is subject to opinion and judgement to a significant degree. Please do not hesitate to contact me if you need any assistance with either the old or new enquiry regimes.

This article is based on an article in ‘Busy Practitioner’, which is published by Tottel Publishing. For further information and ordering details, click here.