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It's in everyone's interest to avoid penalties. Understanding how HM Revenue & Customs (HMRC) penalties work can help you to help your clients avoid them.
Each tax or duty has specific rules on penalties for late payment or filing. A penalty may also be due if your client doesn't tell HMRC about a liability to tax at the right time.
A new penalty system for errors in tax returns and other documents was introduced on 1 April 2009. Its scope was widened from 1 April 2010. Your clients may be charged a penalty if their return or other tax document was inaccurate and tax has been unpaid, understated, over-claimed or under-assessed as a result. They may also face a penalty if they don't tell HMRC that an assessment is too low. This guide provides an overview of penalties with links to more detailed information.
This guide provides an overview of penalties with links to more detailed information.
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When you are acting on behalf of a client, they still retain responsibility for their returns, calculations and payments.
Your authorisation as an agent allows HMRC to deal with you on your client's behalf, but any liability for penalties for late returns, late payments or any errors on paperwork legally remains with your client.
Penalties for late filing of returns and paperwork or late payment differ according to which tax you are dealing with.
Self Assessment tax return deadlines and penalties
What counts as reasonable excuse when an online tax return is filed late
PAYE/National Insurance late payment penalties
PAYE penalties for late and inaccurate returns
Missed VAT deadlines - penalties and surcharges
Late returns and late return penalties under CIS
Penalties can be charged if there are errors on returns or other documents which:
Penalties may also apply if your client doesn't tell HMRC if an assessment is too low. This type of penalty is known as an 'inaccuracy penalty' and applies to the following taxes and duties:
If you or your client sends in a document that contains a mistake, HMRC will charge a penalty if the error is:
The level of the penalty is linked to the reason why the error occurred. The more serious the reason, the higher the maximum penalty can be. HMRC can reduce the penalty if you or your client help them to put things right.
Every individual or business is expected to keep records that allow them to provide a complete and accurate return. HMRC also expects them to check with their agent, or HMRC, to confirm the correct position, if they are not sure.
However, 'reasonable care' is different according to each client's circumstances and abilities. For example, a client with relatively straightforward tax affairs may only need a simple system of record keeping that is regularly updated. A large business with complex tax affairs is expected to have a more sophisticated system that is well-managed.
Types of inaccuracy - What is reasonable care
If a penalty arises because of a lack of reasonable care, the level of the penalty will depend on the reasons for the error and the potential lost revenue (PLR). The PLR is an additional amount of tax which is due or payable as a result of correcting the inaccuracy.
For example:
The penalty can be reduced if you or your client tells HMRC about the error. HMRC may make further reductions depending on the quality of the disclosure. Penalties can be reduced by:
More about penalty calculations and PLR from the HMRC staff Compliance Manual
Download an HMRC factsheet for the Offshore Penalty (PDF 42K)
If your clients don't tell HMRC when changes happen that affect their liability to tax, VAT, or other duties, they may face a penalty. This is known as a 'failure to notify' penalty.
A penalty may occur, for example if your client doesn't tell HMRC, at the right time, that:
This penalty is calculated on PLR which is based on the amount of tax or duty that is unpaid as a result of the failure to notify. HMRC can reduce the penalty if your client tells them about the failure. Further reductions may be made depending on the quality of disclosure in a similar way to the inaccuracy penalty. See the section above for more information.
Read detailed guidance failure to notify penalties
Download an HMRC leaflet on the failure to notify penalty (PDF 92K)
From 6 April 2011 HMRC can charge an increased penalty where an inaccuracy penalty, or a failure to notify penalty, arises and the income or asset that gives rise to the penalty is held outside of the UK. The penalty for failing to submit a return for 12 months can also be increased where offshore assets or income are involved. The level of the penalty depends on how readily the foreign jurisdiction shares information with the UK and only applies to Income Tax and Capital Gains Tax.
More information on the offshore penalty
Download an HMRC leaflet on the offshore penalty (PDF 83K)
From 1 April 2010 HMRC will charge a penalty known as a wrongdoing penalty if your client:
This penalty applies to anyone registered for VAT or Excise, anyone who should be registered to pay VAT or Excise Duty and to other members of the general public.
This penalty is calculated in a similar way to the inaccuracy penalty. HMRC can also reduce it if your client tells them about the wrongdoing.
Detailed guidance on the VAT and Excise wrongdoing penalty
Download an HMRC leaflet on the VAT and Excise wrongdoing penalty (PDF 54K)
As a tax agent and adviser, all of your actions will be geared towards avoiding problems and penalties.
You can give your clients more information about how the system works so they can consider if their record keeping arrangements and processes are adequate to produce accurate returns. Follow the link below to find an HMRC leaflet that may be useful.
New penalties for errors in tax returns and documents (PDF 38K)
It's also a good idea to reinforce to your clients that if they have any questions about their tax and record keeping, they should check with you for advice.
If you would like to know more about how penalties work, you can use the HMRC staff training modules.
HMRC staff training modules on penalties
Detailed guidance is also available in the HMRC staff Compliance Manual, which will continue to be updated.
