Penalties where agent is acting

By Tolley in association with Philip Rutherford

The following Owner-Managed Businesses guidance note by Tolley in association with Philip Rutherford provides comprehensive and up to date tax information covering:

  • Penalties where agent is acting
  • Introduction
  • Inaccuracies when an agent is acting
  • Who is a tax agent?
  • Reasonable care – agent acting
  • Penalties charged on third parties
  • Dishonest conduct of tax agents
  • Case law on penalties for agents


Under the penalty legislation introduced by FA 2007, Sch 24, where an inaccuracy has occurred on a return or other document which leads to an understatement of tax, the taxpayer is exposed to a penalty.

The rate of the penalty is based on the behaviour of the person and whether the disclosure of the error was prompted by HMRC. Once the rate has been calculated, this is then applied to the potential lost revenue (PLR), which is the extra tax due as a result of correcting the inaccuracy or under-assessment, in order to determine the amount of the penalty due.

The behaviour of the taxpayer is covered in more detail in the Calculating the penalty for inaccuracies in returns - behaviour of the taxpayer guidance note. The PLR is discussed in the Calculating the penalty for inaccuracies - potential lost revenue guidance note]. The quality of the disclosure made to HMRC is covered in the Penalty reductions for inaccuracies guidance note.

Inaccuracies when an agent is acting

The taxpayer can be held liable for an inaccuracy in return prepared by an agent.

FA 2007 Sch 2007, para 18

However, the taxpayer is not liable to a penalty in relation to anything done or omitted by the agent if HMRC is satisfied that the taxpayer took reasonable care to avoid an inaccuracy. This would mean that the taxpayer would need evidence that reasonable care had been taken over the tax affairs. For a discussion of reasonable care, see the Reasonable care - inaccuracies in returns guidance note.

FA 2007, Sch 24, para 18(3)

Therefore HMRC must be able to demonstrate that the taxpayer did not take reasonable care. If the taxpayer appointed an agent who was not competent to look after his affairs, this would not demonstrate reasonable care. An example might be where

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