Q1. Why has HM Revenue & Customs (HMRC) changed its penalties?
Q2. What are the main principles of the new penalty systems?
Q3. How can we be sure HMRC officers will apply these penalties properly and consistently?
Q4. How do the new penalties support those who try to get it right?
Q5. How do the new penalties tackle those who try to gain an unfair advantage?
Q6. What can someone do to reduce a penalty?
Q7. Can I appeal against a penalty?
Q8. Is the purpose of the new penalties to raise more money?
Q9. What is a penalty notice assessment?
Q10. What taxes are affected by the penalties?
Q11. What information is available?
Q12. What taxes are subject to the inaccuracy penalty regime and when will it start?
Q13. Who is affected?
Q14. When could a penalty be charged?
Q15. What should I do if I discover an inaccuracy in a return or document I've already sent to HMRC?
Q16. How is the penalty charge calculated?
Q17. What can someone do to reduce a penalty?
Q18. What is reasonable care?
Q19. How can I take reasonable care?
Q20. What happens if an agent, acting on behalf of their client makes a mistake?
Q21. Can an inaccuracy penalty be suspended?
Q22. How does the inaccuracy penalty affect the VAT error orrection procedure?
Q23. Can HMRC penalise a company officer?
Q24. What happens if tax is declared later than it should be?
Q25. What happens with overstated tax losses?
Q26. How does it affect Excise Duty regimes?
Q27. How does it affect Inheritance Tax?
Q28. Why charge penalties on third parties?
Q29. What is the effect on student loans?
Q30. Why did HMRC introduce this penalty?
Q31. What taxes are covered by the failure to notify penalty?
Q32. What are the most common situations where people fail to notify HMRC?
Q33. When does it apply?
Q34. When do I need to notify HMRC to avoid a failure to notify penalty?
Q35. How does the failure to notify penalty encourage people to join the formal economy?
Q36. How can I notify HMRC about a taxable activity?
Q37. Shouldn’t HMRC support new businesses instead of penalising them?
Q38. What is 'reasonable excuse'?
Q39. What are the penalty rates?
Q40. How does HMRC calculate the failure to notify penalty?
Q41. Why did HMRC remove the £100 fixed penalty for Class 2 National Insurance contributions?
Q42. What are the VAT and Excise wrongdoing penalties?
Q43. Who can they apply to?
Q44. Why are additional penalties for VAT and Excise Duties needed?
Q45. What is the unauthorised issue of an invoice showing VAT?
Q46. When can HMRC penalise a person handling excise goods?
Q47. Why can the misuse of red diesel be penalised?
Q48. What is reasonable excuse?
Q49. How is the penalty calculated?
Q50. What is the penalty rate for someone who sells an Excise product knowing it will be misused?
Q51. When can HMRC penalise a company for a wrongdoing committed by an agent?
Q52. When can HMRC penalise a company officer?
Q53. How is the wrongdoing penalty different to existing Excise penalties?
The Government designed the legislation to make the tax system simpler and more consistent.
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.
HMRC undertook a wide-ranging review and public consultation covering its 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.
Penalties ensure fairness for the vast majority who take care to ensure their tax affairs are in order. Most people pay their taxes on time and give information and returns to HMRC at the right times. However it is necessary to have the power to charge financial penalties for those who do not, both to deter such behaviour and to ensure fairness to those who do pay the right amount.
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, duties and levies HMRC administer. In these questions and answers, they are simply referred to as taxes or tax.
The legislation for these penalties is contained in the 2007 and 2008 Finance Acts.
The new civil financial penalties for inaccuracies, failure to notify and VAT and Excise wrongdoing are based on the following principles:
The law sets out the new penalty framework more clearly, which helps HMRC to apply it consistently.
HMRC is committed to training its staff about new legislation. All HMRC officers doing compliance checks receive full guidance and training before they can charge penalties. All frontline compliance staff and their managers will receive the same guidance and training. The learning is also on the internet to help our customers understand the new penalty framework, as is the detailed guidance available in the Compliance Handbook.
We provide HMRC compliance staff with help cards, containing a summary of the new system, to back up the training and guidance.
Caseworkers will give to everyone whose tax they check, one or more of our factsheets. The factsheets explain how we check their tax, what information and inspection powers we can use, what safeguards protect their rights, how we work with them to reach agreement, what penalties we may charge, and what they can do to reduce them. That means they can make informed decisions about how they can best deal with a possible penalty, and understand that if they cooperate we can reduce the penalty.
Managers will also support their caseworkers through the authorisation procedures designed to make sure penalties are applied fairly and consistently.
Once a caseworker discovers tax is due, their manager has to approve their decision on the type of the behaviour that has caused this, before they can formally discuss this with the customer. Later they have to obtain formal authorisation before a penalty can be 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.
We have also set up a broad based implementation governance group, with external representation, to monitor the use of these new powers across HMRC.
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.
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 previously charged. Penalties will however on average 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:
This can quickly mount up!
And if HMRC penalises someone for deliberately evading at least £25,000 of tax, and the person does not fully tell us everything they can about the inaccuracy as soon as we start a check then cooperate with the investigation, HMRC can also publish their details - more information on publishing the details of deliberate defaulters.
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 in a tax return, or the 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 some circumstances. This is because HMRC want to encourage people to discuss their tax problems.
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:
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.
No. The new penalties are to encourage people to comply with their legal obligations and improve customer compliance.
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.
How the penalty legislation in the 2007 and 2008 Finance Acts and Social Security (Contributions) (Amendment No. 4) Regulations 2010, affects 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 |
|
|
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 |
|
X |
|
|
Excise Duties (holdings and movements) |
|
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 Class 1 and Class 4 |
X |
|
X |
|
|
National Insurance Class 1A |
|
|
|
|
X |
National Insurance Class 2 |
|
|
X (but chargeable under Social Security legislation) |
|
|
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 |
|
You can find a wide range of information on HMRC's Internet page 'Take care to avoid a penalty'.
The inaccuracy penalty regime initially applied to inaccuracies in returns and documents for:
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.
Penalties are chargeable on:
A person can include:
Two conditions must be satisfied before HMRC can charge a penalty.
1. The document must contain an inaccuracy that leads to:
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.
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:
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.
The penalty rates for inaccuracies can be
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 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.
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, in some cases to zero.
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 has:
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. We expect people to take their tax seriously.
Some examples of how you can take reasonable care include making sure that:
A return may be inaccurate because someone acting on behalf of a taxpayer, like a tax advisor, has failed to take reasonable care.
It is however, the taxpayer 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:
Yes sometimes it can. 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 you make specified improvements to the way you keep your records. This will help you avoid future inaccuracies.
When considering if suspension is appropriate, before deciding whether to suspend the penalty, HMRC will consider:
HMRC cannot suspend any failure to notify or VAT and Excise wrongdoing penalties.
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 - see our guidance on how to correct VAT errors.
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 HMRC may have to consider whether this is failure to take reasonable care.
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.
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.
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.
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.
HMRC recognises 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 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 need to take 'reasonable care' or they may be liable to a penalty if the return contains inaccuracies.
In response to concerns raised during consultation, HMRC have narrowed the application of this penalty. It only applies 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 applies 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.
The inaccuracy penalty replaced previous error penalties for student loan repayments.
Where the person is self-employed they repay the student loan through the Self Assessment system. The 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 collects repayments of the loan through the payroll and pays them to HMRC. If an employer collects the repayment but does not pass them over, a penalty may be due. The first returns affected are those made after 1 April 2010 for the 2009-10 year.
This is not a new penalty. HMRC inherited a variety of different penalties from both Customs and Excise and the Inland Revenue for people who underpaid tax by not registering for a specific tax, or who failed to tell HMRC about a tax liability. Multiple penalty systems can cause confusion and lead to inconsistency. This can also result in an unnecessary administrative burden.
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; it can harm consumers and erodes tax receipts.
The new penalties apply to almost all the taxes, duties, levies etc we administer. The legislation is in the 2008 Finance Act. 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.
The proposals for failure to notify cover:
The most frequent circumstances when the failure to notify penalty may apply is where you don't tell us at the right time that:
Please check your tax position with us or a competent adviser.
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 you fail to tell HMRC that you 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, you can be liable to a penalty.
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:
Below are some examples for the most common taxes a self employed person or small business is most likely to encounter, when they must notify us or a failure to notify penalty may apply.
Self Assessment Returns
Someone who has not received a self-assessment return or notice to file must tell us if they had income or capital gains that made them chargeable to tax in the previous tax year.
Find you whether you need to complete a tax return.
The deadline for notifying a liability to tax is 5 October, after the end of the tax year.
The deadlines for Self assessment returns are:
Where you file the tax return and pay the tax by the relevant deadlines there is no failure to notify penalty.
You may need to register and await authorisation before you can submit an online return. Be sure to leave yourself enough time for that to happen.
VAT
A business that has exceeded the VAT registration threshold over the past 12 months, or expects to turnover the whole VAT threshold in the next 30 days, must tell us within 30 days.
Find out how and when to register for VAT.
Corporation tax
A company who has not received a Company Tax return or notice to file must tell us if they become chargeable to tax within twelve months from the end of the accounting period.
Different companies can have different accounting dates, so the time limit for notifying HMRC will differ accordingly. For example if the company's accounting date is 30 June 2009 and it is liable to corporation tax for that period, notification of chargeability must be given to HMRC by 29 June 2010.
Detailed information on getting started with Corporation Tax.
National Insurance Contributions from the self employed
There is a very similar penalty for Class 2 National Insurance that we will apply if you do not tell us that you have to pay Class 2 NICs because you have become self-employed. Please remember that if you do not pay the correct amount of NICs, in addition to a penalty, your contributions record may be incomplete and could affect your entitlement to National Insurance Benefits - such as the state pension.
If you start self-employment between 6 April 2009 and 5 April 2010 you must tell us by 31 January 2011 or you could be liable for a penalty.
Read more about self-employed and National Insurance.
More information
In addition to the internet information above, you can also phone one of our helplines:
Additional helplines are listed on our website
Additional helplines are listed on our website - see Contact Us
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:
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.
To register a new partnership for self assessment with HMRC form SA400 should be completed. New partners who need to register for self assessment should use forms SA401 or SA402.
To register online as self employed please follow the link.
Non self-employed customers can also use a single form, SA1, to tell HMRC about their taxable activity. Form SA1 is also available from the HMRC website.
Please phone our helplines to check if you need to notify us about a taxable activity:
A package of measures to support new business is on offer. HMRC recognises 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.
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.
There is no definition of reasonable excuse in the legislation. It is likely to be an exceptional and unforeseeable event beyond the individual's control which prevents them from complying with the obligation. A reasonable excuse can only apply where there has been a failure to do something, such as register on time. Some examples include:
Reasonable excuse does not apply where the failure to notify is deliberate. HMRC would not normally accept the following situations as a reasonable excuse:
The law specifies two situations, which are not reasonable excuses. These are:
If the person does not put right the failure without reasonable delay after the excuse has ended, they will remain liable to a penalty.
The legislation sets out three reasons, or behaviours, which cause a failure to notify. They are:
The more serious the reason for the failure to notify, the higher the maximum penalty is.
No penalty is due unless there is tax or duty unpaid because of the failure. The only exception is 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. 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 failure to notify.
This includes reducing a penalty for a non-deliberate failure to nil when HMRC:
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:
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.
Before 1 April 2010 there was a fixed £100 penalty if someone notified, more than three months late, that they had commenced self-employment.
During the Powers Review consultation in 2008, customers, accountants and representative bodies stated that this penalty was counter-productive. It could, at a crucial stage, damage relations between HMRC and customers.
Although the fixed penalty reinforced the obligation for early notification it did not encourage people to come forward. It often meant the first response from HMRC to a new business that approached it was to impose a penalty.
The new system is more proportionate because a penalty will be related to the amount National Insurance contributions unpaid because of late notification.
From 1 April 2010, a new penalty regime applies where a person:
The legislation is contained in Schedule 41 of the 2008 Finance Act.
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.
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 and vehicles, disruption, criminal prosecutions or revoking registration.
They will enable HMRC to make a more proportionate response in some situations than at present.
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.
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:
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.
Red diesel, and other rebated oils, have a lower rate of duty and are 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 persistent with some commercial hauliers obtaining a considerable commercial advantage over their competitors.
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.
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 unforeseeable 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 what fuel was in the tank.
Other examples include:
Reasonable excuse does not apply where the wrongdoing is deliberate. HMRC would not normally accept the following situations as a reasonable excuse:
The law specifies two situations, which are not reasonable excuses. These are:
If the person does not put right the wrongdoing without reasonable delay after the excuse has ended, they will remain liable to a penalty.
The penalty is 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.
Reason for wrongdoing |
Disclosure |
Minimum penalty |
Maximum penalty |
|---|---|---|---|
Reasonable excuse |
- |
No penalty |
No penalty |
Careless |
Unprompted |
10 per cent |
30 per cent |
- |
Prompted |
20 per cent |
30 per cent |
Deliberate |
Unprompted |
20 per cent |
70 per cent |
- |
Prompted |
35 per cent |
70 per cent |
Deliberate & concealed |
Unprompted |
30 per cent |
100 per cent |
Prompted |
50 per cent |
100 per cent |
The penalty can be reduced if the person tells HMRC about the wrongdoing.
If a person makes an unprompted disclosure there can be a substantial reduction in the level of the penalty charged, in some cases to the minimum percentage.
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 wrongdoing.
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 has:
HMRC will penalise heavily anyone who sells a product, for example red diesel, 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.
Where an agent is acting for a person or company, the person or company remain responsible for ensuring that no wrongdoing occurs. Examples of agents include employees, and advisers such as tax advisers.
That means the person or company can be penalised if the agent carelessly or deliberately:
unless the person or company took reasonable care to avoid the wrongdoing committed by their agent.
Reasonable care to avoid this could for example include setting up systems and procedures to prevent the wrongdoing, and training staff how to use them properly.
We believe it is reasonable to expect the person or company to:
There is a responsibility on the company and its managers to ensure that red diesel is not misused. If the company doesn’t have good systems to prevent misuse and this occurs it can be penalised. Normally HMRC would penalise the company.
HMRC can only penalise a company officer where the wrongdoing they themselves have done is deliberate. An HMRC officer would, during the course of their compliance check, examine the underlying actions or failures that led to the deliberate wrongdoing.
Where there is evidence to identify the officer or officers who caused the deliberate wrongdoing, the officer(s) will be liable for payment of all or part of the penalty in the circumstances detailed below:
The wrongdoing penalty does not replace the existing Excise penalties. We will use the new penalties alongside existing penalties and sanctions like the forfeiture of goods and vehicles, criminal prosecution or revoking tax registration.
And the list of goods subject to Excise duty - alcohol, oil and tobacco products - hasn't changed.
The existing penalties (brought in by the 1984 Finance Act) are fixed fines of £250 for each offence.
The wrongdoing penalty is a percentage of the tax that is due. The percentage varies depending on the behaviour that resulted in the loss of tax - the more serious the behaviour the higher the maximum penalty can be. If a person helps HMRC to establish what the tax should be HMRC will reduce the penalty percentage.
This makes it more flexible, and it is weighted to discourage deliberate tax evasion.
Another difference is that the wrongdoing penalty can be applied to a company or person who sells red diesel knowing that the person buying it will use it for running a vehicle on the roads for which they should be buying normal diesel, which has a higher Excise duty.
And if a company doesn't have robust systems in place to prevent the misuse of red diesel, they can also be subject to the wrongdoing penalty.
The existing penalties don't apply to those two situations outlined above.
