Suspended penalties for inaccuracies in returns

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:

  • Suspended penalties for inaccuracies in returns
  • Background
  • Can the penalty be suspended?
  • Notice of suspension
  • Conditions of suspension
  • SMART conditions
  • Failure to fulfil conditions
  • Appeals in relation to suspensions
  • Case law
  • David Testa
  • More...

Suspended penalties for inaccuracies in returns

Background

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. If a business has formed a VAT group then the representative member is treated as the person, for purposes of applying the penalty regime.

Once the rate has been determined, 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 calculate 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.

If the penalty is due because of a careless inaccuracy HMRC has the discretion to suspend all or part of a penalty for up to two years. HMRC will stipulate conditions to be fulfilled over a period of suspension under FA 2007, Sch 24, para 14. If, at the end of this period, the conditions of suspension are satisfied, then HMRC will cancel the penalty. Otherwise, it will become payable.

This guidance note covers when penalties can be suspended, what conditions might be imposed and what happens if the conditions are not met.

The simplified summary of the suspension of penalties is given in the Flowchart ― overview of suspension of penalties.

HMRC guidance is at CH83110.

Can the penalty be suspended?

The penalty can be suspended if the error has arisen because the person was careless and did not take reasonable

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