PENALTIES FOR ERRORS
PART 1
LIABILITY FOR
PENALTY
Error in taxpayer’s
document
1 (1) A penalty is payable by
a person (P) where—
(a)
P gives HMRC a document of a kind listed in the Table below,
and
(b)
Conditions 1 and 2 are satisfied.
(2) Condition 1 is that the
document contains an inaccuracy which amounts to, or leads
to—
(a)
an understatement of P’s liability to tax,
(b)
a false or inflated statement of a loss by P, or
(c) a false or inflated
claim to repayment of tax.
(3) Condition 2 is that the
inaccuracy was careless or deliberate (within the meaning of paragraph
3).
(4) Where a document
contains more than one inaccuracy, a penalty is payable for each
inaccuracy.
Under-assessment by
HMRC
2 (1) A penalty is payable by
a person (P) where—
(a)
an assessment issued to P by HMRC understates P’s liability to tax,
and
(b)
P has failed to take reasonable steps to notify HMRC, within the period
of 30 days beginning with the date of the assessment, that it is an
under-assessment.
(2) In deciding what steps
(if any) were reasonable HMRC must consider—
(a)
whether P knew, or should have known, about the underassessment,
and
(b)
what steps would have been reasonable to take to notify
HMRC.
(3) In sub-paragraph (1)
“tax” means—
Degrees of
culpability
3 (1) Inaccuracy in a
document given by P to HMRC is—
(a)
“careless” if the inaccuracy is due to failure by P to take reasonable
care,
(b)
“deliberate but not concealed” if the inaccuracy is deliberate but P does
not make arrangements to conceal it, and
(c) “deliberate and
concealed” if the inaccuracy is deliberate and P makes arrangements to conceal
it (for example, by submitting false evidence in support of an inaccurate
figure).
(2) An inaccuracy in a
document given by P to HMRC, which was neither careless nor deliberate when the
document was given, is to be treated as careless if P—
PART 2
AMOUNT OF PENALTY
Standard
amount
4 (1) The penalty payable
under paragraph 1 is—
(a)
for careless action, 30% of the potential lost
revenue,
(b)
for deliberate but not concealed action, 70% of the potential lost
revenue, and
(c) for deliberate and
concealed action, 100% of the potential lost revenue.
(2) The penalty payable
under paragraph 2 is 30% of the potential lost revenue.
(3) Paragraphs 5 to 8
define “potential lost revenue”.
Potential lost
revenue: normal rule
5 (1) “The potential lost
revenue” in respect of an inaccuracy in a document or a failure to notify an
under-assessment is the additional amount due or payable in respect of tax as a
result of correcting the inaccuracy or assessment.
(2) The reference in
sub-paragraph (1) to the additional amount due or payable includes a reference
to—
(a)
an amount payable to HMRC having been erroneously paid by way of
repayment of tax, and
(b)
an amount which would have been repayable by HMRC had the inaccuracy or
assessment not been corrected.
(3) In sub-paragraph (1)
“tax” includes national insurance contributions.
(4) The following shall be
ignored in calculating potential lost revenue under this
paragraph—
(b)
section 419(4) of ICTA (close company: relief for loans); (but this
sub-paragraph does not prevent a penalty being charged in respect of an
inaccurate claim for relief).
Potential lost
revenue: multiple errors
6 (1) Where P is liable to a
penalty in respect of more than one inaccuracy, and the calculation of potential
lost revenue under paragraph 5 in respect of each inaccuracy depends on the
order in which they are corrected—
(a)
careless inaccuracies shall be taken to be corrected before deliberate
inaccuracies, and
(b)
deliberate but not concealed inaccuracies shall be taken to be corrected
before deliberate and concealed inaccuracies.
(2) In calculating
potential lost revenue where P is liable to a penalty in respect of one or more
understatements in one or more documents relating to a tax period, account shall
be taken of any overstatement in any document given by P which relates to the
same tax period.
(a)
“understatement” means an inaccuracy that satisfies Condition 1 of
paragraph 1, and
(b)
“overstatement” means an inaccuracy that does not satisfy that
condition.
(4) For the purposes of
sub-paragraph (2) overstatements shall be set against understatements in the
following order—
(a)
understatements in respect of which P is not liable to a
penalty,
(c) deliberate but not
concealed understatements, and
(d)
deliberate and concealed understatements.
(5) In calculating
potential lost revenue in respect of a document given by or on behalf of P no
account shall be taken of the fact that a potential loss of revenue from P is or
may be balanced by a potential over-payment by another person (except to the
extent that an enactment requires or permits a person’s tax liability to be
adjusted by reference to P’s).
Potential lost
revenue: losses
7 (1) Where an inaccuracy has
the result that a loss is wrongly recorded for purposes of direct tax and the
loss has been wholly used to reduce the amount due or payable in respect of tax,
the potential lost revenue is calculated in accordance with paragraph
5.
(2) Where an inaccuracy has
the result that a loss is wrongly recorded for purposes of direct tax and the
loss has not been wholly used to reduce the amount due or payable in respect of
tax, the potential lost revenue is—
(a)
the potential lost revenue calculated in accordance with paragraph 5 in
respect of any part of the loss that has been used to reduce the amount due or
payable in respect of tax, plus
(b)
10% of any part that has not.
(3) Sub-paragraphs (1) and
(2) apply both—
(a)
to a case where no loss would have been recorded but for the inaccuracy,
and
(b)
to a case where a loss of a different amount would have been recorded
(but in that case sub-paragraphs (1) and (2) apply only to the difference
between the amount recorded and the true amount).
(4) Where an inaccuracy has
the effect of creating or increasing an aggregate loss recorded for a group of
companies—
(a)
the potential lost revenue shall be calculated in accordance with this
paragraph, and
(b)
in applying paragraph 5 in accordance with sub-paragraphs (1) and (2)
above, group relief may be taken into account (despite paragraph
5(4)(a)).
(5) The potential lost
revenue in respect of a loss is nil where, because of the nature of the loss or
P’s circumstances, there is no reasonable prospect of the loss being used to
support a claim to reduce a tax liability (of any person).
Potential lost
revenue: delayed tax
8 (1) Where an inaccuracy
resulted in an amount of tax being declared later than it should have been (“the
delayed tax”), the potential lost revenue is—
(a)
5% of the delayed tax for each year of the delay,
or
(b)
a percentage of the delayed tax, for each separate period of delay of
less than a year, equating to 5% per year.
(2) This paragraph does not
apply to a case to which paragraph 7 applies.
Reductions for
disclosure
9 (1) A person discloses an
inaccuracy or a failure to disclose an underassessment by—
(b)
giving HMRC reasonable help in quantifying the inaccuracy or
under-assessment, and
(c) allowing HMRC access to
records for the purpose of ensuring that the inaccuracy or under-assessment is
fully corrected.
(a)
is “unprompted” if 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 or
under-assessment, and
(3) In relation to
disclosure “quality” includes timing, nature and extent.
10 (1) Where a person who
would otherwise be liable to a 30% penalty has made an unprompted disclosure,
HMRC shall reduce the 30% to a percentage (which may be 0%) which reflects the
quality of the disclosure.
(2) Where a person who
would otherwise be liable to a 30% penalty has made a prompted disclosure, HMRC
shall reduce the 30% to a percentage, not below 15%, which reflects the quality
of the disclosure.
(3) Where a person who
would otherwise be liable to a 70% penalty has made an unprompted disclosure,
HMRC shall reduce the 70% to a percentage, not below 20%, which reflects the
quality of the disclosure.
(4) Where a person who
would otherwise be liable to a 70% penalty has made a prompted disclosure, HMRC
shall reduce the 70% to a percentage, not below 35%, which reflects the quality
of the disclosure.
(5) Where a person who
would otherwise be liable to a 100% penalty has made an unprompted disclosure,
HMRC shall reduce the 100% to a percentage, not below 30%, which reflects the
quality of the disclosure.
(6) Where a person who
would otherwise be liable to a 100% penalty has made a prompted disclosure, HMRC
shall reduce the 100% to a percentage, not below 50%, which reflects the quality
of the disclosure.
Special
reduction
11 (1) If they think it right
because of special circumstances, HMRC may reduce a penalty under paragraph 1 or
2.
(2) In sub-paragraph (1)
“special circumstances” does not include—
(b)
the fact that a potential loss of revenue from one taxpayer is balanced
by a potential over-payment by another.
(3) In sub-paragraph (1)
the reference to reducing a penalty includes a reference
to—
(b)
agreeing a compromise in relation to proceedings for a penalty.
Interaction with
other penalties
12 (1) The final entry in the
Table in paragraph 1 excludes a document in respect of which a penalty is
payable under section 98 of TMA 1970 (special returns).
(2) The amount of a penalty
for which P is liable under paragraph 1 or 2 in respect of a document relating
to a tax period shall be reduced by the amount of any other penalty which P has
incurred and the amount of which is determined by reference to P’s tax liability
for that period.
(3) In the application of
section 97A of TMA 1970 (multiple penalties) no account shall be taken of a
penalty under paragraph 1 or 2.
PART 3
PROCEDURE
Assessment
13 (1) Where P becomes liable
for a penalty under paragraph 1 or 2 HMRC shall—
(c) state in the notice a
tax period in respect of which the penalty is assessed.
(a)
shall be treated for procedural purposes in the same way as an assessment
to tax (except in respect of a matter expressly provided for by this
Act),
(b)
may be enforced as if it were an assessment to tax,
and
(c) may be combined with an
assessment to tax.
(3) An assessment of a
penalty under paragraph 1 must be made within the period of 12 months beginning
with—
(a)
the end of the appeal period for the decision correcting the inaccuracy,
or
(b)
if there is no assessment within paragraph (a), the date on which the
inaccuracy is corrected.
(4) An assessment of a
penalty under paragraph 2 must be made within the period of 12 months beginning
with the end of the appeal period for the assessment of tax which corrected the
understatement.
(5) For the purpose of
sub-paragraphs (3) and (4) a reference to an appeal period is a reference to the
period during which—
(a)
an appeal could be brought, or
(b)
an appeal that has been brought has not been determined or
withdrawn.
(6) Subject to
sub-paragraphs (3) and (4), a supplementary assessment may be made in respect of
a penalty if an earlier assessment operated by reference to an underestimate of
potential lost revenue.
Suspension
14 (1) HMRC may suspend all or
part of a penalty for a careless inaccuracy under paragraph 1 by notice in
writing to P.
(a)
what part of the penalty is to be suspended,
(b)
a period of suspension not exceeding two years, and
(c) conditions of
suspension to be complied with by P.
(3) HMRC may suspend all or
part of a penalty only if compliance with a condition of suspension would help P
to avoid becoming liable to further penalties under paragraph 1 for careless
inaccuracy.
(4) A condition of
suspension may specify—
(b)
a period within which it must be taken.
(5) On the expiry of the
period of suspension—
(a)
if P satisfies HMRC that the conditions of suspension have been complied
with, the suspended penalty or part is cancelled, and
(b)
otherwise, the suspended penalty or part becomes
payable.
(6) If, during the period
of suspension of all or part of a penalty under paragraph 1, P becomes liable
for another penalty under that paragraph, the suspended penalty or part becomes
payable.
Appeal
15 (1) P may appeal against a
decision of HMRC that a penalty is payable by P.
(2) P may appeal against a
decision of HMRC as to the amount of a penalty payable by
P.
(3) P may appeal against a
decision of HMRC not to suspend a penalty payable by P.
(4) P may appeal against a
decision of HMRC setting conditions of suspension of a penalty payable by
P.
16 An appeal may be
brought to—
(a)
the General Commissioners, in so far as the penalty relates to direct
tax, or
(b)
a VAT and duties tribunal, in so far as the penalty relates to
VAT.
17 (1) On an appeal under
paragraph 15(1) the appellate tribunal may affirm or cancel HMRC’s
decision.
(2) On an appeal under
paragraph 15(2) the appellate tribunal may—
(a)
affirm HMRC’s decision, or
(b)
substitute for HMRC’s decision another decision that HMRC had power to
make.
(3) If the appellate
tribunal substitutes its decision for HMRC’s, the appellate tribunal may rely on
paragraph 11—
(a)
to the same extent as HMRC (which may mean applying the same percentage
reduction as HMRC to a different starting point), or
(b)
to a different extent, but only if the appellate tribunal thinks that
HMRC’s decision in respect of the application of paragraph 11 was
flawed.
(4) On an appeal under
paragraph 15(3)—
(a)
the appellate tribunal may order HMRC to suspend the penalty only if it
thinks that HMRC’s decision not to suspend was flawed, and
(b)
if the appellate tribunal orders HMRC to suspend the
penalty—
(i) P may appeal to
the appellate tribunal against a provision of the notice of suspension,
and
(ii) the appellate
tribunal may order HMRC to amend the notice.
(5) On an appeal under
paragraph 15(4) the appellate tribunal—
(a)
may affirm the conditions of suspension, or
(b)
may vary the conditions of suspension, but only if the appellate tribunal
thinks that HMRC’s decision in respect of the conditions was
flawed.
(6) In sub-paragraphs
(3)(b), (4)(a) and (5)(b) “flawed” means flawed when considered in the light of
the principles applicable in proceedings for judicial
review.
(7) Paragraph 14 (see in
particular paragraph 14(3)) is subject to the possibility of an order under this
paragraph.
PART 4
MISCELLANEOUS
Agency
18 (1) P is liable under
paragraph 1(1)(a) where a document which contains a careless inaccuracy (within
the meaning of paragraph 3) is given to HMRC on P’s
behalf.
(2) In paragraph 2(1)(b)
and (2)(a) a reference to P includes a reference to a person who acts on P’s
behalf in relation to tax.
(3) Despite sub-paragraphs
(1) and (2), P is not liable to a penalty in respect of anything done or omitted
by P’s agent where P satisfies HMRC that P took reasonable care to avoid
inaccuracy (in relation to paragraph 1) or unreasonable failure (in relation to
paragraph 2).
(4) In paragraph 3(1)(a)
(whether in its application to a document given by P or, by virtue of
sub-paragraph (1) above, in its application to a document given on P’s behalf) a
reference to P includes a reference to a person who acts on P’s behalf in
relation to tax.
(5) In paragraph 3(2) a
reference to P includes a reference to a person who acts on P’s behalf in
relation to tax.
Companies:
officers’ liability
19 (1) Where a penalty under
paragraph 1 is payable by a company for a deliberate inaccuracy which was
attributable to an officer of the company—
(a)
the officer as well as the company shall be liable to pay the penalty,
and
(b)
HMRC may pursue the officer for such portion of the penalty (which may be
100%) as they may specify by written notice to the
officer.
(2) Sub-paragraph (1) does
not allow HMRC to recover more than 100% of a penalty.
(3) In the application of
sub-paragraph (1) to a body corporate “officer” means—
(a)
a director (including a shadow director within the meaning of section 251
of the Companies Act 2006 (c. 46)), or
(4) In the application of
sub-paragraph (1) in any other case “officer” means—
(d)
any other person managing or purporting to manage any of the company’s
affairs.
(5) A reference to P in this
Schedule (including paragraph 15) includes a reference to an officer of the
company who is liable for a portion of the penalty in accordance with this
paragraph.
Partnerships
20 (1) This paragraph applies
where P is liable to a penalty under paragraph 1 for an inaccuracy in or in
connection with a partnership return.
(2) Where the inaccuracy
affects the amount of tax due or payable by a partner of P, the partner is also
liable to a penalty (“a partner’s penalty”).
(3) Paragraphs 4 to 13 and
19 shall apply in relation to a partner’s penalty (for which purpose a reference
to P shall be taken as a reference to the partner).
(4) Potential lost revenue
shall be calculated separately for the purpose of P’s penalty and any partner’s
penalty, by reference to the proportions of any tax liability that would be
borne by each partner.
(5) Paragraph 14 shall
apply jointly to P’s penalty and any partner’s penalties.
(6) P may bring an appeal
under paragraph 15 in respect of a partner’s penalty (in addition to any appeal
that P may bring in connection with the penalty for which P is
liable).
Double
jeopardy
21 P is not liable to a
penalty under paragraph 1 or 2 in respect of an inaccuracy or failure in respect
of which P has been convicted of an offence.
PART 5
GENERAL
Interpretation
22 Paragraphs 23 to 26
apply for the construction of this Schedule.
23 HMRC means Her
Majesty’s Revenue and Customs.
24 An expression used in
relation to income tax has the same meaning as in the Income Tax
Acts.
25 An expression used in
relation to corporation tax has the same meaning as in the Corporation Tax
Acts.
26 An expression used in
relation to capital gains tax has the same meaning as in the enactments relating
to that tax.
27 An expression used in
relation to VAT has the same meaning as in VATA 1994.
(a)
a reference to corporation tax includes a reference to tax or duty which
by virtue of an enactment is assessable or chargeable as if it were corporation
tax,
(b)
a reference to tax includes a reference to construction industry
deductions under Chapter 3 of Part 3 of FA 2004,
(d)
a reference to understating liability to VAT includes a reference to
overstating entitlement to a VAT credit,
(e) a reference to a loss
includes a reference to a charge, expense, deficit and any other amount which
may be available for, or relied on to claim, a deduction or
relief,
(f) a reference to
repayment of tax includes a reference to allowing a
credit,
(g) “tax period” means a
tax year, accounting period or other period in respect of which tax is
charged,
(h) a reference to giving a
document to HMRC includes a reference to communicating information to HMRC in
any form and by any method (whether by post, fax, email, telephone or
otherwise),
(i) a reference to giving a
document to HMRC includes a reference to making a statement or declaration in a
document,
(j) a reference to making a
return or doing anything in relation to a return includes a reference to
amending a return or doing anything in relation to an amended return,
and
(k) a reference to action
includes a reference to omission.
Consequential
amendments
29 The following
provisions are omitted—
(a)
sections 95, 95A, 97 and 98A(4) of TMA 1970 (incorrect returns and
accounts),
(b)
sections 100A(1) and 103(2) of TMA 1970 (deceased
persons),
(c) in Schedule 18 to FA
1998 (company tax returns), paragraphs 20 and 89 (company tax returns),
and
(d)
sections 60, 61, 63 and 64 of VATA 1994 (evasion).
30 In paragraph 7 of
Schedule 1 to the Social Security Contributions and Benefits Act 1992 (c. 4)
(penalties) a reference to a provision of TMA 1970 shall be construed as a
reference to this Schedule so far as is necessary to preserve its
effect.
31 In paragraph 7 of
Schedule 1 to the Social Security Contributions and Benefits (Northern Ireland)
Act 1992 (c. 7) (penalties) a reference to a provision of TMA 1970 shall be
construed as a reference to this Schedule so far as is necessary to preserve its
effect.