Overview of the new HMRC penalty regime
Produced by Tolley
Background
HMRC is aware that most businesses take care to declare and pay the right amount of tax on time. HMRC use penalties to discourage businesses from being careless with regard to their tax affairs and to ensure the businesses who do not act in a reasonable manner suffer a financial cost for failure to administer their tax affairs accurately.
HMRC was aware that the penalty regimes that have been historically applied across indirect and direct taxes were wide ranging, cumbersome and difficult to understand. As a result of an extensive consultation exercise HMRC introduced three new penalties with effect from 1 April 2010 (although some actually came into effect in 2009). For the penalty regime prior to 1 April 2010, see the Penalties regime prior to 1 April 2010 guidance note.
The penalty is calculated as a percentage of the additional tax actually due or under-declared by the business and is payable in addition to the actual tax due and any interest due.
The willingness of the business to cooperate with HMRC in dealing with issues that arise can affect the level of penalty applied. HMRC can reduce the level of penalties charged if the business:
• provides HMRC full details regarding the additional VAT that is due• assists HMRC with calculating the amount of VAT due
• provides HMRC with full access to the relevant business records and calculations
The three new penalties
Inaccuracy penalty
From 1 April 2009 there is a penalty for filing inaccurate VAT documents and returns. This penalty will be extended to almost all taxes for return periods starting on or after 1 April 2009, for documents / returns filed on or after 1 April 2010. See below for a list of affected taxes. For VAT the inaccuracy penalty was effective from 1 April 2009.
Under the new system HMRC will not penalise businesses that take reasonable care to get their VAT right. Taking reasonable care includes:
• keeping accurate records to make sure that the VAT returns are correct• checking the correct VAT position if the business is unsure regarding the proper VAT treatment of a transaction
• advising HMRC promptly about any error discovered on VAT return or document after it has been submitted to HMRC
Failure to notify penalty
From 1 April 2010 HMRC can apply a penalty if HMRC identifies that a business has failed to notify them of a VAT obligation at the correct time.
The failure to notify penalty will applies most commonly to VAT, where a business fails to tell HMRC at the right time that:
• the business' turnover has reached the VAT registration threshold• a type of business is started that is required to register with HMRC, for example for Excise Duty
• the business' circumstances change in another way that affects its VAT position
VAT and excise wrongdoing penalties
From 1 April 2010 HMRC will apply wrongdoing penalties where a business:
• issues an invoice that includes VAT which they are not entitled to charge• handles goods on which Excise Duty has not been paid or deferred
• uses a product in a way that means more Excise Duty should have been paid
• supplies a product at a lower rate of Excise Duty knowing that it will be used in a way that means a higher rate of Excise Duty should be paid
This penalty applies to anyone registered for VAT or excise, anyone who should be registered to pay VAT or excise duties and to other members of the general public.
'Indirect taxes' are affected by the new penalty regime
The table below shows how the penalty legislation in the 2007 and 2008 Finance Acts and Social Security (Contributions) (Amendment No. 4) Regulations 2010, affects indirect taxes.
| Tax, duty or levy | Take effect from 1 April 2009 Inaccuracy penalties Sch 24 2007 Finance Act | Take effect from 1 April 2010 Inaccuracy Penalties Sch 24 FA2007 (as amended by Sch 40 Finance Act 2008) | Take effect from 1 April 2010 Failure to notify penalty Sch 41 Finance Act 2008 | Take effect from 1 April 2010 VAT and Excise wrongdoing penalties Sch 41 2008 Finance Act | Take effect from 6 July 2011 Inaccuracy Penalties Sch 24 2007 (as amended by Social Security Regulations 2010) |
| Aggregates levy | X | X | |||
| Alcohol liquor duties | X | X | X | ||
| Amusement machine licence duty | X | ||||
| Bingo duty | X | X | |||
| Climate change levy | X | X | |||
| Excise duties (holdings and movements) | X | X | X | ||
| Gaming duty | X | X | |||
| General betting duties | X | X | |||
| Hydrocarbon oil duties | X | X | X | ||
| Insurance premium tax | X | X | |||
| Landfill tax | X | X | |||
| Lottery duty | X | X | |||
| Remote gaming Duty | X | X | |||
| Tobacco products duty | X | X | X | ||
| VAT | X | X | X |
Who is affected by the new penalty regime?
Penalties are chargeable on the following 'person':
• a person who fails to take reasonable care or deliberately fails to pay the correct amount of VAT• a person who deliberately causes an inaccuracy in another person's document, which results in the failure to pay the correct amount of VAT
A person can include:
• an individual• a company, or officer of a company
• a partner
• a partnership
• a representative member of a VAT group
• a personal representative
• a trustee
• a pension scheme administrator
• some types of cooperative or collective
CH91250
Penalties that can be applied
HMRC calculate penalties as a percentage of the additional tax due. This will be calculated on the total VAT due when the inaccuracy is corrected. The additional VAT due is called the 'potential lost revenue'.
HMRC measure the potential lost revenue differently where the inaccuracy results in an overstated loss.
The penalty rates for inaccuracies will depend on which penalty is to be applied.
Inaccurate returns / documents
The following penalties can be levied on businesses that submit inaccurate VAT returns or do not keep relevant documentation:
| Inaccurate returns and documents | Disclosure | Minimum penalty | Maximum penalty |
| Reasonable excuse | No penalty | No penalty | |
| Carelessness | Unprompted | No penalty | 30% |
| Carelessness | Prompted | 15% | 30% |
| Deliberate | Unprompted | 20% | 70% |
| Deliberate | Prompted | 35% | 70% |
| Deliberate and concealed | Unprompted | 30% | 100% |
| Deliberate and concealed | Prompted | 50% | 100% |
Failure to notify and wrongdoings
For failure to notify and wrongdoings the following penalty ranges can be applied by HMRC:
| Inaccurate returns and documents | Disclosure | Minimum penalty | Maximum penalty |
| Reasonable Excuse | No Penalty | No Penalty | |
| Carelessness | Unprompted | No penalty | 30% |
| Carelessness | Prompted | 15% | 30% |
| Deliberate | Unprompted | 20% | 70% |
| Deliberate | Prompted | 35% | 70% |
| Deliberate and concealed | Unprompted | 30% | 100% |
| Deliberate and concealed | Prompted | 50% | 100% |
There is no penalty if a business can demonstrate they have taken reasonable care to get the VAT due correct, but despite this, submit an incorrect return. Please see the Reasonable care and careless mistakes guidance note.
The percentages are higher when the underlying behaviour causing the inaccuracy is more serious. Penalties are significantly higher for those businesses who deliberately try not to pay the right amount of VAT to obtain an unfair advantage. Please see the Deliberate understatement guidance note.
If a business voluntarily discloses inaccuracies in a VAT return, or they make a disclosure when the businesses realises that it has failed to notify HMRC of a relevant fact, this will substantially reduce any potential penalty, especially if the disclosure is unprompted. A disclosure is unprompted if the person making it has no reason to believe that HMRC has discovered or is about to discover the inaccuracy or failure.
Where the inaccuracy or failure is not deliberate, and the person admits it without prompting, the penalty can be reduced to zero in some circumstances.
Appealing against a penalty
A business has the right to appeal to an independent tribunal against a penalty levied by HMRC if they disagree with it. An appeal is usually submitted to the First-tier Tribunal of the Tax Chamber.
CH97200
CH97250
Businesses can appeal against:
• the imposition of a penalty• the amount of a penalty
• a decision not to suspend a penalty
Businesses can also opt for an internal review by an independent HMRC officer. This is a quick and inexpensive way to resolve disputes and adviser should usually advise a business to start with an internal review by HMRC before commencing with an Appeal because this is expensive and time consuming.
Factsheet HMRC 1 - appeals against penalties gives further information about what to do if a business disagrees with a ruling reached by HMRC.
Penalty notice assessments
If a business is liable to a penalty, HMRC will send the business a penalty assessment. The penalty notice assessment advises the business about the amount of VAT due and that the penalty must be paid within 30 days. The penalty assessment is enforceable in the same way as an assessment to tax. HMRC can combine a penalty assessment with an assessment of tax.
The penalty notice will apply to VAT returns or other documents for return periods starting on or after 1 April 2008 that are due to be filed on or after 1 April 2009.
FA 2007, Sch 24 .
New penalties for inaccuracies to almost all the other taxes, duties and levies administered by HMRC.
FA 2007, Sch 24 .
Return periods commencing on or after 1 April 2009 where the return is due to be filed on or after 1 April 2010, are affected by this second phase of penalty reform.
Reasonable excuse
There is no definition of 'reasonable excuse' in the legislation. Therefore this will cause businesses uncertainty should they make an error with regard their VAT affairs. HMRC considers that all businesses have a responsibility to take reasonable care. HMRC considers that what is necessary for each person to meet their responsibility will depend on their abilities and circumstances.
For example, HMRC might not expect the same level of knowledge or expertise from a self-employed and unrepresented individual as it would from a large multinational company that employs a VAT specialist. HMRC will expect a person to take a higher degree of care over large and complex matters than simple straightforward ones.
Businesses are expected to keep sufficient records for them to provide a complete and accurate return. A person with straightforward tax affairs may only need to keep a simple system of records, which they must follow and regularly update. A person with larger and more complex tax affairs may need to put in place more sophisticated systems and maintain them equally carefully.
HMRC believes it is reasonable to expect a business that does not understand a VAT issue to take care to check the correct VAT treatment or to seek suitable advice from HMRC or a competent VAT adviser.
Reasonable excuse - inaccurate accounting records
Some examples of how a business can take reasonable care include making sure that:
• the accounting records and systems are accurate and complete• effective systems and processes are in operation and followed by the business
• sufficient decision making processes are in place in relation to the returns and documents submitted
• the tax treatment is ascertained in respect of the business activities undertaken and advice obtained from HMRC or a competent VAT adviser where necessary
Reasonable excuse - failure to notify and wrongdoing penalties
Reasonable excuse is likely to apply when an exceptional and unforeseeable event occurs that is beyond the business' control and prevented the business from complying with the obligation. A reasonable excuse can only apply where there has been a failure to do something, such as VAT register on time. Some examples include:
• bereavement - the death of a partner or close relative around the time that the business should have told HMRC of the taxable activity• serious illness around the time that the person responsible for the business should have told HMRC of the taxable activity
• unforeseen events, for example, the letter or form notifying HMRC was lost or delayed in the post because of an unforeseen event disrupting the postal service like prolonged industrial action, or a fire or flood at the sorting office
Reasonable excuse will not apply where the failure to notify is deliberate CH92100 / CH92150. HMRC would not normally accept the following situations as a reasonable excuse:
• pressure of work• lack of information
• lack of understanding of the basic law
The law specifies two situations which are not considered by HMRC to constitute a reasonable excuses CH92250. These are:
• lack of funds, unless this is due to unforeseen events outside the business' control CH92300• reliance on another person - unless the business can show they took reasonable care to make sure the other person completed the required task before the due date. CH92350
If the business does not put right the failure without reasonable delay after the excuse has ended, they will remain liable to a penalty.
Suspended penalties
HMRC cannot suspend any failure to notify or VAT and Excise wrongdoing penalties. Therefore only businesses that have submitted an inaccurate return or document can approach HMRC to clarify whether a penalty could be suspended. HMRC will only consider suspending penalties that resulted from a failure to take 'reasonable care'. The penalty cannot be suspended if the it results from a deliberate inaccuracy.
If suspension is appropriate, HMRC will agree and set the suspension conditions. If the business meets the conditions of the penalty suspension then the penalty will be cancelled at the end of the suspension period. If the business fails to meet the conditions the penalty will have to be paid to HMRC. The period of suspension can be up to two years. The purpose of introducing suspended penalties is to provide an incentive for businesses to improve their processes so inaccuracies are less likely to occur going forward.
For example, if a careless inaccuracy is due to poor record keeping, one of the conditions of suspension could be that the business makes specified improvements to the method used to complete the VAT books and records. The intention of the penalty suspension is to encourage the business to make the necessary improvements that will ensure that the business avoids future inaccuracies and therefore penalties.
HMRC will consider the following facts when determining whether it is appropriate to suspend a penalty:
• the business' compliance• the level of disclosure
• the nature of the inaccuracy
See diagram below for suspending penalties for an inaccurate VAT return:
