Briefing on new penalties

General questions and answers about the new penalty systems 3

Q1. Why is HM Revenue & Customs (HMRC) changing its penalties? 3
Q2. Shouldn’t HMRC be supporting businesses in the recession rather than penalising them? 3
Q3. What are the main principles of the new penalty systems? 4
Q4. How do the new penalties support those who try to get it right? 4
Q5. How do the new penalties tackle those who try to gain an unfair advantage? 4
Q6. What can someone do to reduce a penalty? 5
Q7. Can I appeal against a penalty? 5
Q8. Is the purpose of the new penalties to raise more money? 6
Q9. What is a penalty notice assessment? 6
Q10. What taxes are affected by the penalties? 6
Q11. What information is available? 8

Questions and answers about inaccuracy penalties 8

Q12. What taxes are subject to the inaccuracy penalty regime and when will it start? 8
Q13. Who will be affected? 9
Q14. When could a penalty be charged? 9
Q15. What should I do if I discover an inaccuracy in a return or document I’ve already sent to HMRC? 10
Q16. How is the penalty charge calculated? 10
Q17. What can someone do to reduce a penalty? 11
Q18. What is reasonable care? 11
Q19. How can I take reasonable care? 11
Q20. What happens if an agent, acting on behalf of somebody, makes a mistake? 12
Q21. Can an inaccuracy penalty be suspended? 12
Q22. How will the new penalties affect the Error Correction Procedure customers can use for indirect taxes like VAT? 13
Q23. Can HMRC penalise a company officer? 13
Q24. What happens if tax is declared later than it should be? 13
Q25. What happens with overstated tax losses? 13
Q26. Do the inaccuracy penalties apply to groups of companies? 14
Q27. How can we be sure HMRC officers will apply these penalties properly and consistently? 14
Q28. What learning and guidance is available? 14
Q29. What other taxes have the inaccuracy penalties been extended to? 15
Q30. What is the likely impact of extending the inaccuracy penalties? 16
Q31. How will it affect Excise Duty regimes? 16
Q32. How will it affect Inheritance Tax 16
Q33. Why charge penalties on third parties? 17
Q34. Is HMRC trying to charge penalties on tax advisors? 17
Q35. What will be the effect on student loans? 17

Questions and answers about the failure to notify penalty 18

Q36. Why are HMRC introducing this penalty? 18
Q37. When will this usually apply? 18
Q38. What taxes are covered by the failure to notify penalty? 18
Q39. When does it apply? 19
Q40. What is the likely impact of the penalty? 19
Q41. How are HMRC encouraging people to join the formal economy? 19
Q42. How can I notify HMRC about a taxable activity? 20
Q43. Shouldn’t HMRC be supporting new businesses not penalising them? 20
Q44. What is 'reasonable excuse'? 21
Q45. What are the maximum penalty rates? 21
Q46. How will HMRC calculate the failure to notify penalty? 21
Q47. Why is HMRC removing the £100 fixed penalty for Class 2 National Insurance contributions? 22

Questions and answers about the VAT and Excise wrongdoing penalties 22

Q48. What are the VAT and Excise wrongdoing penalties? 22
Q49. Who will they apply to? 23
Q50. Why are additional penalties for VAT and Excise Duties needed? 23
Q51. What is the unauthorised issue of an invoice showing VAT? 23
Q52. When can HMRC penalise a person handling excise goods? 23
Q53. Why can the misuse of red diesel be penalised? 24
Q54. What is reasonable excuse? 24
Q55. How is the penalty calculated? 24
Q56. What is the penalty rate for someone who sells an Excise product knowing it will be misused? 25
Q57. When must a wrongdoing penalty be paid? 25

General questions and answers about the new penalty systems

Q1. Why is HM Revenue & Customs (HMRC) changing its penalties?

HMRC inherited a variety of different penalties from both Customs and Excise and the Inland Revenue. Multiple penalty systems can cause confusion and lead to inconsistency. This can also result in an unnecessary administrative burden.

The new penalties apply to almost all the taxes, duties, levies etc we administer. The new legislation for these penalties is contained in the 2007 and 2008 Finance Acts. In these questions and answers, they are simply referred to as taxes or tax.

The Government designed the legislation to make the tax system simpler and more consistent. HMRC undertook a wide-ranging review and public consultation covering powers, deterrents and safeguards, known as the 'Powers Review', before the introduction of the new legislation.

The Powers Review consulted a wide range of customers, representative bodies, accountants, HMRC staff and others during the development of the new penalties. HMRC staff, accountants and representative bodies have also helped develop the technical guidance and the operational and process guidance.

During the consultation, customers and their agents said they wanted a fair system and told HMRC to do more to support those who tried to get their tax right, but come down hard on those who tried to get an unfair advantage by not complying.

The consultation on the 'Modernising Powers, Deterrents and Safeguards: Penalties reform - the next stage' ended March 6 2008 and can be viewed on the HMRC website under Consultations

Q2. Shouldn’t HMRC be supporting businesses in the recession rather than penalising them?

While it is vital that HMRC help businesses through the recession, it remains necessary to have the power to charge financial penalties for those who do not:

  • send accurate documents or returns and as a result fail to pay the correct amount of tax at the right time
  • notify a new taxable activity or new liability to tax

HMRC also need to be able to charge penalties for VAT and Excise wrongdoings.

Penalties ensure fairness for the vast majority who take care to ensure their tax affairs are in order.

Penalties are not new. Both the Inland Revenue and Customs and Excise used them. What is new is a single consistent system of penalties that will apply to almost all of the taxes HMRC administer.

To help businesses facing temporary financial difficulties HMRC has launched a new dedicated Business Payment Support Service. As part of this service, businesses will be able to spread their payments over a longer period in a way they can afford.

Provided the taxpayer contacts HMRC before the payment becomes due, no additional late payment surcharges will be added to these 'time to pay arrangements'.

You can find further advice about this service on the HMRC website at Business Payment Support Service, or phone the dedicated support line on Tel: 0845 302 1435. The line is open from 8.00 am to 8.00 pm during the week and 8.00 am to 4.00 pm at weekends.

Q3. What are the main principles of the new penalty systems?

The new civil financial penalties for inaccuracies, failure to notify and VAT and Excise wrongdoing are based on the following principles:

  • supporting those who seek to comply but coming down hard on those who seek an unfair advantage through non-compliance
  • being simple to understand and administer, efficient and effective
  • being a deterrent but also offering positive encouragement if somebody thinks they might not have paid the right amount of tax
  • recognising the seriousness placed on non-compliance
  • providing a fair balance between the powers needed and safeguards for customers
  • being proportionate in response to the risk involved

Q4. How do the new penalties support those who try to get it right?

During the consultation, customers and their agents said they wanted a fair tax system.

The new legislation takes account of this through the concepts of ‘reasonable care’ in the inaccuracy penalties, and ‘reasonable excuse’ for failing to meet a requirement, for example failing to register for VAT at the correct time.

If a person can demonstrate that they have taken reasonable care to get their tax right, or have a reasonable excuse, they will not be penalised if they make an error.

Under some circumstances, HMRC can also suspend an inaccuracy penalty that results from a failure to take reasonable care when a person is able and willing to take positive action to prevent similar kinds of inaccuracies occurring in the future.

Q5. How do the new penalties tackle those who try to gain an unfair advantage?

If a person does not take reasonable care to get their tax right, or does not have a reasonable excuse, they can be penalised if they get it wrong. The penalties will be higher if the inaccuracy is deliberate and higher again if they also try to conceal the inaccuracy.

Penalties for failing to take reasonable care will not overall be higher than the penalties currently charged. Penalties will however be significantly higher for those who deliberately set out not to pay the right amount of tax.

Those who try to get an unfair advantage will have to pay:

  • any tax that is due
  • any interest that is due
  • any penalties that are due

This can quickly mount up!

Q6. What can someone do to reduce a penalty?

The new penalties are designed to encourage people to come forward when they think there is a problem with their tax affairs or they have failed to meet a requirement.

Disclosing inaccuracies or failure to notify a taxable activity early 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 many cases. This is because HMRC want to encourage people to discuss their tax problems.

Q7. Can I appeal against a penalty?

You have the right to appeal to an independent tribunal, which will usually be the First-tier Tribunal of the Tax Chamber.

You can appeal against:

  • the imposition of a penalty
  • the amount of a penalty
  • a decision not to suspend a penalty

You can also opt for an internal review by an independent HMRC officer. This is a quick and inexpensive way to resolve disputes.

Factsheet 'HMRC 1' (PDF 31K) gives further information about disagreeing with HMRC decisions from 1 April 2009.

Q8. Is the purpose of the new penalties to raise more money?

No. The new penalties are to encourage people to comply with their legal obligations and improve customer compliance.

Q9. What is a penalty notice assessment?

If a person is liable to a penalty, HMRC will send them a penalty assessment.

This will tell them what they owe 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.

Q10. What taxes are affected by the penalties?

How the penalty legislation in the 2007 and 2008 Finance Acts affects taxes

Tax, duty or levy Inaccuracy penalties Sch 24 2007 Finance Inaccuracy Penalties Sch 24 FA2007 (as amended by Sch 40 Finance Act 2008) Failure to notify a relevant obligation penalty Sch 41 Finance Act 2008 VAT and Excise wrongdoing penalties Sch 41 2008 Finance Act
Aggregates Levy
X
X
Air Passenger Duty
X
X
Alcohol Liquor Duties
X
X
X
Amusement Machine Licence Duty
X
Bingo Duty
X
X
Capital Gains Tax
X
X
Climate Change Levy
X
X
Construction Industry Scheme
X
Corporation Tax
X
Excise Duties
X
X
X
Gaming Duty
X
X
General Betting Duties
X
X
Hydrocarbon Oil Duties
X
X
X
Income Tax
X
X
Inheritance Tax
X
Insurance Premium Tax
X
X
Landfill Tax
X
X
Lottery Duty
X
X
National Insurance
X (excluding Class 1A)
X (Class 2 and Class 4 )
PAYE
X
Petroleum Revenue Tax
X
Pool Betting Duty
X
X
Remote Gaming Duty
X
X
Stamp Duty Land Tax
X
Stamp Duty Reserve Tax
X
Tobacco Products Duty
X
X
X
VAT
X
X
X

Q11. What information is available?

You can find a wide range of information on HMRC's Internet page Take reasonable care to avoid a penalty including a simple summary, and technical guidance, which is contained in the Compliance Handbook.

Further technical guidance about other penalties and operational and process guidance for the inaccuracy penalties will be added by 1 April 2009.

HMRC has set up a new penalties mailbox to answer questions if you cannot find the answer elsewhere; the address is Penalties, New (SEND07A).

Questions and answers about inaccuracy penalties

Q12. What taxes are subject to the inaccuracy penalty regime and when will it start?

The inaccuracy penalty regime is initially for inaccuracies in returns and documents for:

  • Capital Gains Tax
  • Construction Industry Scheme
  • Corporation Tax
  • Income Tax
  • National Insurance contributions (but not Class 1A NIC)
  • PAYE
  • VAT

It applies to 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. The legislation is Schedule 24 of Finance Act 2007.

Schedule 40 of Finance Act 2008 extended the new penalties for inaccuracies to almost all the other taxes, duties and levies we administer.

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.

Q13. Who will be affected?

Penalties are chargeable on:

  • a person who fails to take reasonable care or deliberately fails to pay the correct amount of tax
  • a person who deliberately causes an inaccuracy in another person’s document, which results in the failure to pay the correct amount of tax

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 co-operative or collective

Q14. When could a penalty be charged?

Two conditions must be satisfied before HMRC can charge a penalty.

1. The document must contain an inaccuracy that leads to:

  • an understatement of the person’s liability to tax
  • or a false or inflated statement of a loss by the person
  • or a false or inflated claim for a repayment of tax

2. The inaccuracy must be careless, deliberate, or deliberate and concealed.

HMRC may consider charging a penalty where tax has been under-assessed because of a person's failure to send a return, or where a person has discovered an inaccuracy in a document but has not taken reasonable steps to tell HMRC.

Penalties are chargeable for a tax period, for example a tax year, accounting period or other relevant period, for which tax is charged or due.

Q15. What should I do if I discover an inaccuracy in a return or document I’ve already sent to HMRC?

Please contact HMRC as soon as possible about the inaccuracy, giving as much detail as possible.

Even if the inaccuracy was neither careless nor deliberate at the time the document was sent, it will still be treated as careless if you do not take reasonable steps to inform HMRC, after you have discovered the inaccuracy.

Reasonable steps include, for example:

  • consulting an accountant or agent to discuss the position so they can inform HMRC
  • phoning HMRC to discuss it
  • discussing it with one of HMRC's officers during an ongoing compliance check
  • emailing, faxing or writing to HMRC with the details

Q16. How is the penalty charge calculated?

HMRC calculate penalties as a percentage of the additional tax due. This will be calculated when the inaccuracy is corrected. The additional tax due is called the potential lost revenue.

HMRC measure the potential lost revenue differently where the inaccuracy results in an overstated loss:

  • there is no penalty if a person can demonstrate they have taken reasonable care to get their tax right, but despite this, submit an incorrect return
  • the penalty is up to 30 per cent of the potential lost revenue if the inaccuracy is careless
  • the penalty is up to 70 per cent of the potential lost revenue if the inaccuracy is deliberate
  • the penalty is up to 100 per cent of the potential lost revenue if the inaccuracy is deliberate and the person attempts to conceal it

The percentages are stepped and are higher when the underlying behaviour causing the inaccuracy is more serious. Penalties are significantly higher for those who deliberately try not to pay the right amount of tax to obtain an unfair advantage.

The penalty payable where tax has been under-assessed because of the person's failure to send a return is 30 per cent of the potential lost revenue.

Q17. What can someone do to reduce a penalty?

HMRC want people to come forward when they think there is a problem with their tax affairs or they have failed to meet a requirement.

If a person makes an unprompted disclosure of the inaccuracies there can be a substantial reduction in the level of the penalty charged.

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 to discover the inaccuracy or under-assessment.

HMRC can give further reductions based on the quality of the disclosure. To calculate the reduction HMRC consider three elements of disclosure and to what degree the person is:

  • telling about their inaccuracy
  • helping work out what extra tax is due
  • giving access to their records to check their figures

Q18. What is reasonable care?

Everyone has a responsibility to take reasonable care. 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 multi-national company. HMRC expect a person to take a higher degree of care over large and complex matters than simple straightforward ones.

Everyone is expected to make and 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 person who does not understand a tax issue to take care to check the correct tax treatment or to seek suitable advice from HMRC or a competent advisor. People are expected to take their tax seriously.

Q19. How can I take reasonable care?

To take reasonable care please make sure that:

  • your accounting records and systems are accurate and complete
  • you follow your systems and processes
  • you check across all the taxes you pay when filing returns
  • you can show your decision making processes in relation to the returns and documents you submit
  • you find out the correct tax treatment in relation to your circumstances or seek advice from HMRC or a competent advisor

Q20. What happens if an agent, acting on behalf of somebody, makes a mistake?

A return may be inaccurate because someone acting on behalf of a person, like a tax advisor, has failed to take reasonable care.

It is however, the person who is responsible for the accuracy of the return, and they may still be charged a penalty.

No penalty would be due if the person can show that they took reasonable care to ensure that the return was accurate.

Reasonable care in this context would include:

  • appointing an agent competent to deal with their affairs
  • giving the agent all the relevant information
  • checking the return as far as they could, before it was submitted

Q21. Can an inaccuracy penalty be suspended?

Suspension is a new concept. Its purpose is to support those who take positive action to avoid further inaccuracies in the future.

HMRC can only consider suspension if the penalty is a result of a failure to take reasonable care, it cannot be suspended if the penalty results from a deliberate inaccuracy. If suspension is appropriate, HMRC will agree and set suspension conditions. If you meet the conditions, the penalty is cancelled. If you do not meet the conditions, you will have to pay the penalty. The period of suspension can be up to two years.

For example, if a careless inaccuracy is due to poor record keeping, one of the conditions of suspension could be that the person makes specified improvements to the way they keep their records. This will help the person avoid future inaccuracies.

When considering if suspension is appropriate, before deciding whether to suspend the penalty, HMRCl consider:

  • what general behaviours towards compliance have been demonstrated
  • the level of disclosure
  • the nature of the inaccuracy

HMRC cannot suspend any failure to notify or VAT and Excise wrongdoing penalties.

Q22. How will the new penalties affect the Error Correction Procedure customers can use for indirect taxes like VAT?

The VAT error correction procedure (previously the voluntary disclosure regime) corrects errors on past returns. No penalty was due if the taxpayer voluntarily disclosed the error to HMRC or if they had a 'reasonable excuse'.

Under the new regime customers are still expected to disclose errors. Most voluntary disclosures are of mistakes made despite taking reasonable care, so will still incur no penalty. If they are below the de minimis level they can be corrected on the next return. (The de minimis level was increased in the 2008 Budget, see Budget Note 75. (PDF 730K)

For careless errors, penalties can still be reduced to nil if a full unprompted disclosure is made. This means telling HMRC about the error, helping to determine the correct amount of tax due and allowing access to the figures to check the result. Simply correcting an error on the next return is not an unprompted disclosure.

If a business makes repeated disclosures of the same sort of errors then the question of whether this is failure to take reasonable care may have to be considered.

Q23. Can HMRC penalise a company officer?

HMRC normally collect any penalties that are due from the company. If however the inaccuracy was deliberate there are some circumstances, such as where a company officer gained personally from the inaccuracy, or where a company is about to go into liquidation when HMRC can pursue the company officer for payment of the penalty.

Q24. What happens if tax is declared later than it should be?

Where an inaccuracy results in the declaration of an amount of tax later than it should have been (rather than not being declared or being under-declared), the potential lost revenue on which the penalty is based is set by law at 5 per cent of the delayed tax for each year of the delay.

For indirect taxes, if the period is less than a year, the charge is a lower, percentage, which is the equivalent of 5 per cent in a year.

Q25. What happens with overstated tax losses?

For direct tax, a penalty will be due where a deliberate or careless inaccuracy leads to overstated tax losses. Where the tax effect of the loss is not known because not all the loss has been used, the penalty will be based on 10 per cent of the potential lost revenue unless there is no prospect of the loss being used.

Q26. Do the inaccuracy penalties apply to groups of companies?

Yes, they apply in the same way as they do to single companies.

Q27. How can we be sure HMRC officers will apply these penalties properly and consistently?

The law sets out the new penalty framework more clearly, which will also help HMRC apply it consistently.

HMRC is committed to training its staff, including training them about new legislation. All HMRC officers involved in compliance checks will receive full guidance and training before they can charge penalties.

The learning and guidance will be rolled out nationally so all frontline compliance staff and their managers, regardless of the unit they work in, will receive the same core messages and products.

Training will cover important differences in approach such as understanding the types of inaccuracy and behaviours; the appropriate use of suspended penalties, and the encouragement of greater openness between the department and taxpayer which can lead to generous reductions in the penalty amount.

Training will be supported by operational and process guidance. This is available in the Compliance Handbook on the Internet, together with the technical guidance.

Caseworkers will ensure that everyone who is subject to a compliance check will receive written information to explain their rights and how the new system works.

In addition, the caseworkers will have support from their managers as they follow the governance procedures designed to make sure penalties are applied fairly and consistently. Once a caseworker discovers the inaccuracy their manager has to approve their decision on the type of the inaccuracy, before they can formally discuss this with the customer.

At a later stage they have to obtain formal authorisation from a more senior officer before a penalty is issued. The authorising officer will review the caseworker’s decision and consider if the Department is applying the legislation properly and consistently, in each case.

If you disagree with a penalty you can:

  • use the complaints procedure
  • appeal to an independent tribunal
  • ask HMRC to conduct an internal review of the decision

Q28. What learning and guidance is available?

To help staff, customers and their advisers HMRC have prepared an overview of the new penalties in an e-learning module that should take about 30 minutes to complete.

The e-learning module is available from the Online learning system and the HMRC website at New penalties for inaccuracies in documents and returns - Awareness Learning.

More detailed learning for staff, in the form of a self learning module, product code 0011691, is available through the Online learning system. HMRC will announce when this will be made available externally.

Face-to-face learning is available from March 2009 and will be cascaded to all HMRC frontline compliance staff.

The learning will be supported by the technical guidance and operational and process guidance already published in the Compliance Handbook. Technical guidance for the failure to notify and the VAT and Excise wrongdoing penalties will be published in the Compliance Handbook in April 2009.

HMRC compliance staff will also be provided with help cards, containing a summary of the new system.

Q29. What other taxes have the inaccuracy penalties been extended to?

Schedule 40 of the 2008 Finance Bill has created a single penalty regime for incorrect returns across the majority of taxes, levies and duties HMRC administer. Regimes included in this second phase are:

  • Aggregates Levy
  • Air Passenger Duty
  • Alcohol Excise Duties
  • Bingo Duty
  • Climate Change Levy
  • Excise Duties
  • Gaming Duty
  • General Betting Duties
  • Hydrocarbon Oil Duties
  • Inheritance Tax
  • Insurance Premium Tax
  • Landfill Tax
  • Lottery Duty
  • Petroleum Revenue Tax
  • Pool Betting Duty
  • Remote Gaming Duty
  • Stamp Duty Land Tax
  • Stamp Duty Reserve Tax
  • Tobacco Products Duty

Customs Duty, The Minimum Wage and Money Laundering Regulations are excluded.

The penalties apply for return periods beginning on or after 1 April 2009 where the return is due to be filed on or after 1 April 2010.

Q30. What is the likely impact of extending the inaccuracy penalties?

Research suggests that a significant proportion of inaccuracies in returns are made despite the taxpayer taking reasonable care, for which no penalty would be due under the new regime.

There is a gap in existing penalties for Excise Duties, environmental taxes and Insurance Premium Taxes around failing to take reasonable care. The new penalties will fill that gap and should stimulate a change in behaviour so more people will become voluntarily compliant.

Where someone deliberately understates their tax liability, penalties will be higher than at present. This is an important deterrent to remove the unfair competitive advantage that otherwise would be gained.

Q31. How will it affect Excise Duty regimes?

As for other taxes, no penalty will apply where an error is made despite reasonable care.

HMRC recognised that when considering if a person has taken reasonable care, for Excise Duties there is a need to consider manufacturing processes as well as record keeping and accounting systems.

The new penalties should reassure compliant excise traders that those seeking an unfair advantage through deliberate non-compliance will face more effective and proportionate penalties.

These penalties will sit alongside the range of other sanctions in use against the non-compliant, including those involved in deliberate fraud. These sanctions include the forfeiture of goods, disruption, criminal prosecutions or revoking registration.

Q32. How will it affect Inheritance Tax

Like other taxes, HMRC already charge penalties for some incorrect Inheritance Tax accounts.

Under the new regime if someone makes an error, despite having taken reasonable care they will not be penalised.

HMRC recognise that Inheritance Tax applies to a single event and concepts such as reasonable care will be somewhat different under these circumstances than for taxes where people have to make returns more regularly. It also recognises that the position of personal representatives is different from other individuals and trustees who may make a transfer that is liable to Inheritance Tax.

The 'relevant period' for the Inheritance Tax return will be the date of death or other chargeable event. Where people send in returns for deaths and other chargeable events occurring on or after 1 April 2009 they will need to take ‘reasonable care’ or they may be liable to a penalty if the return contains inaccuracies.

Q33. Why charge penalties on third parties?

In response to concerns raised during consultation, HMRC have narrowed the application of this penalty. It will only apply where a third party deliberately falsified or deliberately withheld information from the taxpayer who has to complete the return, and where HMRC is able to demonstrate that the third party intended to cause a document to be inaccurate.

Charging the penalty directly on the third party should deter behaviour that disadvantages those who comply.

One example is where the beneficiaries of an estate deliberately withhold details of assets from the personal representative in order to understate the Inheritance Tax due. The potential to charge a penalty on the beneficiary, who would benefit from the understatement of tax due, would give the personal representative more power to gather full information from the beneficiaries, removing the unfair advantage gained by deliberate non-compliance.

Another example relates to tobacco, alcohol and oils held in excise warehouses. The warehouse keeper is responsible for making returns. Sometimes the owner, consignee or haulier of goods may deliberately misinform or withhold information from the warehouse keeper on the removal of the goods.

The ability to charge a penalty directly on the third party should strengthen the deterrent effect of the penalty regime. This provision will apply across all the taxes under the inaccuracy penalty regime, for return periods beginning on or after 1 April 2009 where the return is due to be filed on or after 1 April 2010.

Q34. Is HMRC trying to charge penalties on tax advisors?

No. The legislation enables HMRC to charge a penalty on a third party where the third party has deliberately falsified or withheld information to the person who has to complete the return. To charge a penalty HMRC have to demonstrate that the third party intended to cause a tax return to be inaccurate.

It is extremely unlikely that a tax advisor would be liable to such a penalty.

Q35. What will be the effect on student loans?

The new inaccuracy penalties will replace existing error penalties for student loan repayments.

Where the person is self-employed they will repay the student loan through the Self Assessment system. The new inaccuracy penalties apply to Self Assessment for return periods starting on or after 1 April 2008 that are due to be filed on or after 1 April 2009.

If the person is employed, their employer will collect repayments of student loans through payroll and pay these to HMRC. If an employer collects the repayment but does not pass it over, a penalty may be due. The first returns affected are those made after 1 April 2010 for the 2009-10 year.

Questions and answers about the failure to notify penalty

Q36. Why are HMRC introducing this penalty?

This is not a new penalty. There are already penalties for people who underpay tax by not telling HMRC that they are carrying out a notifiable taxable activity or who fail to tell HMRC about a tax liability.

One aim of the new penalty system is to encourage business and individuals to become part of the legitimate economy. The informal economy undermines the competitiveness of honest businesses and individuals, can harm consumers and erodes tax receipts.

The penalty for failure to notify is very similar to the new penalty system for inaccuracies because they are both based on the same principles.

Q37. When will this usually apply?

The most frequent circumstances when the failure to notify penalty will apply is where a new business fails to register with HMRC, or a business exceeds the VAT threshold and does not tell HMRC at the right time.

For Direct Taxes such as Income Tax and Capital Gains Tax, the requirement is to notify any tax liability, which arises from a new taxable activity. For example, there is no need to notify a new business provided you notify the tax liability arising from income from this business on a tax return you are already required to complete.

If however, you do not complete tax returns because you have no tax liability and income from this new activity means you have tax to pay, you are required to notify HMRC about it.

Equally, if a person fails to tell HMRC that they have a tax liability, for example, because of a one off Capital Gain and then do not pay the tax due at the correct time, they will be liable to a penalty.

Q38. What taxes are covered by the failure to notify penalty?

The proposals for failure to notify cover:

  • Aggregates Levy
  • Air Passenger Duty
  • Alcohol Duties
  • Amusement Machine Licence Duty
  • Bingo Duty
  • Capital Gains Tax
  • Climate Change levy
  • Corporation Tax
  • Excise Duties
  • Gaming Duty
  • General Betting Duty
  • Hydrocarbon Oil Duties
  • Income Tax (but not PAYE)
  • Insurance Premium Tax
  • Landfill Tax
  • Lottery Duty
  • National Insurance contributions
  • Pool Betting Duty
  • Remote Gaming Duty
  • Tobacco Products Duty
  • VAT

Q39. When does it apply?

The new failure to notify penalty regime applies to failures occurring on or after 1 April 2010. This means the first time that the penalties can apply is:

  • Income Tax, Capitals Gain Tax and Class 4 National Insurance contributions for the 2009-10 tax period
  • Corporation Tax - accounting periods ending on or after 1 April 2009
  • VAT - failures to notify liability to register which arises on or after 1 April 2010
  • other taxes and duties - failures where the obligation arises on or after 1 April 2010

Q40. What is the likely impact of the penalty?

Most people who notify late do so within two to three years of the date they should have originally registered and then help determine the tax unpaid as a result of the failure.

It is anticipated that most penalties under the new regime will fall in the lower end of the suggested 10 per cent to 30 per cent bracket, after reductions for disclosure have been allowed.

Q41. How are HMRC encouraging people to join the formal economy?

People who start a business or engage in a taxable activity should let HMRC know and register for and pay the correct amount of tax.

Under the new penalty system:

  • there is no penalty until tax is unpaid as a result of failing to notify
  • If a person makes a full and unprompted disclosure within 12 months of first becoming liable for a failure to notify penalty, the penalty can be reduced to zero
  • the current £100 fixed penalty for National Insurance where a person notifies us more than three months after becoming self-employed is abolished

Q42. How can I notify HMRC about a taxable activity?

The diverse nature of the taxes HMRC administer makes it difficult to have a single notification system.

HMRC is working to make notification simpler. For example, a self-employed person can use a single form, CWF1, to tell HMRC that they are self-employed for Income Tax and National Insurance. They can also notify on the same form that they need to register for VAT.

Form CWF1 is available from the HMRC website

Please phone our helplines to check if you need to notify us about a taxable activity:

  • newly self-employed Tel: 0845 915 4515
  • new employers Tel: 0845 60 70 143
  • check if you need to register for VAT Tel: 0845 010 9000

These are all open during the week from 8.00 am to 8.00 pm. The first two are also open weekends from 8.00 am until 4.00 pm.

Q43. Shouldn’t HMRC be supporting new businesses not penalising them?

A package of measures to support new business is on offer. It is recognised this is a crucial time to establish good relations with customers and to help them to pay the right amount of tax at the right time.

For example, there is a lot of information for new businesses on the HMRC website at Starting in business.

This is explained in more detail in Question 2.

HMRC encourage people to join the formal economy. The new system removes fixed penalties and only applies if tax has been lost because of the failure to notify. When someone tells HMRC they should have registered a new taxable activity within a year of a penalty becoming due, any penalty can be reduced to nil.

But to be fair to those who do register and pay on time a penalty is needed for those failing to do so. There is also a need to take a tough line on those deliberately evading the system.

Q44. What is 'reasonable excuse'?

There is no definition of reasonable excuse in the legislation. It is likely to be an exceptional event beyond the individual’s control. A reasonable excuse can only apply where there has been a failure to do something, such as register on time. Some examples include:

  • bereavement – the death of a partner or close relative around the time the person should have told HMRC of the taxable activity
  • serious illness of the person or of a close relative around the time they should have told HMRC of the taxable activity
  • unforeseen events – 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 does not apply where the failure to notify is deliberate.
HMRC would not normally accept the following situations as a reasonable excuse:

  • pressure of work
  • lack of information
  • ignorance of basic law

The law specifies two situations, which are not reasonable excuses. These are:

  • lack of funds – unless this is due to unforeseen events outside the person’s control
  • reliance on another person – unless the person can show they took reasonable care to make sure the other person completed what they were asked to do

If the person does not put right the failure without reasonable delay after the excuse has ended, they will remain liable to a penalty.

Q45. What are the maximum penalty rates?

The legislation sets out three reasons, or behaviours, which cause a failure to notify. They are:

  • not deliberate, with a maximum penalty of 30 per cent
  • deliberate, but without concealment – maximum penalty of 70 per cent
  • deliberate with concealment – maximum penalty of 100 per cent

The more serious the reason for the failure to notify, the higher the maximum penalty is.

Q46. How will HMRC calculate the failure to notify penalty?

No penalty is due unless there is tax or duty unpaid because of the failure. The only exception will be for some Excise Duty registrations where the business is required to obtain approval before they can commence trading.

If HMRC is told about the taxable activity or liability, it will allow a reduction for disclosure, with larger reductions if the disclosure is unprompted.

This includes reducing a penalty for a non-deliberate failure to nil when HMRC:

  • told about the failure within 12 months
  • then given full and complete assistance to help quantify the tax due

If there has been a failure to notify and tax has been unpaid for more than 12 months, then the minimum penalty is 10 per cent. This will increase where the failure was:

  • deliberate, but without concealment – minimum penalty of 20 per cent
  • deliberate with concealment – minimum penalty of 30 per cent

The more a person tells HMRC and helps to establish the amount of tax due, including allowing access to their records, the more the penalty can be reduced down to the minimum.

Q47. Why is HMRC removing the £100 fixed penalty for Class 2 National Insurance contributions?

Currently there is a fixed £100 penalty if someone notifies that they commenced self-employment more than three months late.

During the consultation, people stated that this penalty is counter-productive and can, at a crucial stage, damage relations between HMRC and customers.

Although the fixed penalty reinforces the obligation for early notification it does not encourage people to come forward and can often mean the first response to a new business that has approached HMRC is to impose a penalty.

The new system is more proportionate because a penalty will be related to the amount of both Income Tax and National Insurance contributions unpaid because of late notification.

Questions and answers about the VAT and Excise wrongdoing penalties

Q48. What are the VAT and Excise wrongdoing penalties?

From 1 April 2010, a new penalty regime will apply where a person:

  • makes an unauthorised issue of an invoice showing VAT or an amount inclusive of VAT
  • misuses a product like red diesel so that a higher rate of excise duty is due
  • handles goods, such as alcohol or tobacco products, that are subject to unpaid duty

The legislation is contained in Schedule 41 of the 2008 Finance Act.

Q49. Who will they apply to?

The wrongdoing penalties can apply to any person, who is not registered, but should be registered to pay VAT or Excise Duties. They can also apply to members of the general public, who are not required to be registered to pay VAT or Excise Duties.

The penalties provide another sanction for the department to use for fraud against VAT and Excise Duties.

Q50. Why are additional penalties for VAT and Excise Duties needed?

VAT and the Excise Duties on alcohol, oil and tobacco products are subject to persistent and widespread fraud.

The wrongdoing penalties will sit alongside the range of other sanctions used against the non-compliant, including those involved in deliberate fraud. These sanctions include the forfeiture of goods, vehicles, disruption, criminal prosecutions or revoking registration.

They will enable HMRC to make a more proportionate response in some situations than at present.

Q51. What is the unauthorised issue of an invoice showing VAT?

Most commonly, this occurs when someone who is not registered for VAT or who doesn’t work for a VAT registered business, issues an invoice that includes VAT.

Q52. When can HMRC penalise a person handling excise goods?

A person can become liable to a wrongdoing penalty if they handle goods subject to Excise Duty, and at that time the Excise Duty has not been paid or deferred.

Handling goods is defined as:

  • acquiring the goods
  • being involved in carrying, removing, depositing or keeping the goods
  • selling these goods

One example is buying cigarettes abroad and selling them in the UK. Cigarettes can only be brought into the UK, without paying UK excise duty, if they are for your own use.

Q53. Why can the misuse of red diesel be penalised?

Red diesel, and other rebated oils, has a lower rate of duty and is therefore cheaper than diesel legally sold for vehicles using the roads.

The use of red diesel is restricted, for example to agricultural vehicles and kerosene for heating. The red (gas oil) and yellow (kerosene) dyes are added to deter misuse and make it easier for Revenue and Customs officers to detect it.

There is significant non-compliance with the oils Excise Duty regime. Some of this misuse is repeated and persistent with some commercial hauliers obtaining a considerable commercial advantage over their competitors. Estimates suggest that as much as £350 million is lost to the Exchequer each year from the illicit market in petrol and diesel.

The wrongdoing penalty will effectively help to remove the advantage gained by misusing excise goods. Criminal prosecution will remain an option which will continue to be used where appropriate.

Q54. What is reasonable excuse?

A person won’t be liable to a penalty for a non deliberate wrongdoing if they can show that they have a reasonable excuse.

Supplying products knowing that they will be misused is a deliberate act. Consequently there can be no reasonable excuse for this type of wrongdoing.

Reasonable excuse is not defined in law, and what is reasonable will differ from person to person depending on their particular circumstances. It is likely to be an exceptional and unforeseen event beyond the person’s control.

For example an individual detected running on red diesel may have done so unwittingly because they had that day bought a car from a third party and so could not reasonably have known how it was fuelled.

See also the examples given in Question 44 about reasonable excuse in the failure to notify penalty.

Q55. How is the penalty calculated?

The penalty will be based on the amount shown as VAT on an unauthorised invoice, or the amount of Excise Duty unpaid because of the wrongdoing. This unpaid tax or duty is the potential lost revenue.

The penalty is calculated by applying an appropriate percentage to the potential lost revenue.

The penalty is the appropriate percentage of the potential lost revenue and depends on whether the wrongdoing was:

  • deliberate and concealed – maximum penalty 100 per cent, minimum penalty 30 per cent
  • deliberate but not concealed – maximum penalty 70 per cent, minimum 20 per cent
  • non-deliberate – maximum penalty 30 per cent, minimum 10 per cent.

The penalty is reduced if the person tells HMRC about the wrongdoing. As with the other penalties the amount of reduction depends on whether the disclosure is unprompted or prompted, and how much help the person gives to establish the correct amount of tax that is due.

Q56. What is the penalty rate for someone who sells an Excise product knowing it will be misused?

HMRC will penalise heavily anyone who sells a product, for example red diesel, spirits or cigarettes, knowing it will be misused for a purpose that means a higher rate of excise duty should be paid.

The appropriate maximum penalty will be100 per cent, although if the person makes a full and unprompted disclosure, and helps establish the amount of duty due, it can be reduced to a minimum penalty of 30 per cent.

Q57. When must a wrongdoing penalty be paid?

A VAT or Excise wrongdoing penalty must be paid within 30 days. The 30 days begins on the date the penalty assessment is issued.