Penalties for inaccuracies in returns ― overview

Produced by Tolley in association with Philip Rutherford

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

  • Penalties for inaccuracies in returns ― overview
  • Introduction
  • Scope of the penalty regime for inaccuracies
  • Events triggering penalties
  • Inaccuracies
  • Assessments and determinations

Penalties for inaccuracies in returns ― overview

Introduction

As part of their modernisation of powers, deterrents and safeguards, HMRC introduced a harmonised penalty regime for errors in returns and documents with effect from 1 April 2009. The regime was extended to a wider range of taxes from 1 April 2010. The main legislation is found at FA 2007, s 97 and FA 2008, s 122. This legislation was brought in to simplify and harmonise the penalty regime across all of the major taxes.

HMRC has also provided the following factsheets: CC/FS7a regarding inaccuracies and CC/FS7b regarding under-assessments.

The main aim of the legislation was:

  1. to align the penalty regime across direct and indirect taxes

  2. to provide a deterrent to non-compliance by penalising those who fail to comply

  3. to encourage the non-compliant to return voluntarily to compliance

It was also envisaged that the tiered approach under the regime would introduce fairer and more proportionate results for offences of differing levels of behaviour. HMRC made it clear in the consultation that it felt higher penalties were appropriate for those who did not disclose errors unless prompted and / or did not cooperate in a check of the returns.

The basis of calculation of penalties is a two-stage process:

  1. 1)

    calculate a percentage, based on the taxpayer’s behaviour ― see the Calculating the penalty for inaccuracies in returns ― behaviour of the taxpayer guidance note

  2. 2)

    calculate the potential lost revenue (PLR). This is the extra tax due as a result of correcting the inaccuracy or under-assessment ― see the Calculating the penalty for inaccuracies ― potential lost revenue guidance note

The result of these two calculations gives the amount of the penalty.

A simplified summary of the regime is given in the Flowchart ― penalty for filing incorrect tax return, which was adapted from the HM

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