Penalty reductions for inaccuracies

Produced by Tolley in association with Philip Rutherford
Penalty reductions for inaccuracies

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

  • Penalty reductions for inaccuracies
  • Introduction
  • Prompted and unprompted disclosure
  • Unprompted disclosure
  • Prompted disclosure
  • Determining where a disclosure is prompted or unprompted
  • Quality of disclosure
  • Telling HMRC about the inaccuracy (maximum reduction 30%)
  • Helping HMRC quantify the inaccuracy (maximum reduction 40%)
  • Giving access to HMRC to ensure full disclosure (maximum reduction 30%)
  • More...

Introduction

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. This rate 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, to calculate the amount of the penalty due.

This is discussed in more detail in the Penalties for inaccuracies in returns ― overview, Calculating the penalty for inaccuracies in returns ― behaviour of the taxpayer and Calculating the penalty for inaccuracies ― potential lost revenue guidance notes.

HMRC guidance is at CH82400 onwards.

The rate of penalty can be reduced if the taxpayer comes forward to inform HMRC about the inaccuracy and further by the nature and quality of the information and documentation provided to HMRC. This is known as the quality of disclosure and is discussed in this guidance note.

Prompted and unprompted disclosure

A disclosure is unprompted if it is made at a time when the taxpayer has no reason to believe that HMRC has discovered the inaccuracy or under-assessment.

Otherwise, a disclosure is prompted.

A disclosure must fall into one of these categories. There is both a smaller range of potential penalties and lower highest possible penalty for voluntary disclosures:

BehaviourUnprompted disclosure ― penalty rangePrompted disclosure ― penalty range
Careless / lack of reasonable care0%–30%15%–30%
Deliberate20%–70%35%–70%
Deliberate and concealed30%–100%50%–100%

FA 2007, Sch 24, paras 4, 10

See also the Table ― penalty for filing incorrect self assessment tax return.

There is generally no penalty if the taxpayer demonstrates reasonable care, see the Reasonable care ― inaccuracies in returns guidance note.

Where a penalty is potentially due, the exact level of the penalty is determined by the quality of disclosure. See the ‘Quality of disclosure’ section below.

Note that there are specific rules for penalties in

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