The tax penalty system contains two broad categories of penalties; those for late filing or late payment which increase according to the delay in filing or payment, and behavioural penalties which relate to errors in documents, failure to notify and under-assessment by HMRC.
Late filing or payment
These penalties are based on the period of delay of the filing or tax payment, which is easy to quantify. The second element of the penalty is either a fixed charge or the tax liability. It is always worth checking that both of these elements have been correctly measured before they were included in the penalty calculation, as HMRC does make mistakes.
If the calculation is correct, the taxpayer must demonstrate a reasonable excuse for the delay as grounds for an appeal against the penalty. We can help you frame your story which supports the reasonable excuse, and suggest which documents need to be retained to send to HMRC, should they undertake an internal review of the appeal.
The factors making up the reasonable excuse can include the actions or inactions of HMRC, as demonstrated in the VAT surcharge case of MOC (Scotland) Ltd v HMRC. In that case the company received such poor service from HMRC that the tribunal decided the taxpayer did have reasonable excuse for late payment.
The taxpayer can now make an online appeal against late filing or late payment penalties relating to their 2015/16 SA return. We can’t submit an online appeal on behalf of our client, as the online mechanism hasn’t been opened up to tax agents. However, we can still submit a paper appeal for our client using the form SA370.
The first element of a behavioural penalty is a percentage based on whether the taxpayer’s mistake was careless, deliberate, or deliberate and concealed, which is further adjusted depending on how the error was disclosed. This percentage is multiplied by the potential lost revenue (PLR).
Where the error or mistake relates to a loss claim, the PLR is calculated as the tax which would be avoided/ refunded should the loss be set against the taxpayer’s income or gains. HMRC generally insist that the PLR must be based on the whole loss, even some of the loss has yet to be used against income or gains. However, FA 2007, Sch 24 requires the PLR calculation to ignore any part of the loss that has no prospect of being used.
Simon Fry claimed a capital loss of over £10.7m as an unrecoverable loan to a trader (TCGA 1992, s 253). He used £202,071 of this loss against other gains, and then left the UK permanently. HMRC challenged the £10.7m loss claim and Fry withdrew that claim. He had to pay £34,554 in CGT on the £202,071 gain previously covered by the loss.
HMRC imposed an inaccuracy penalty of 15% of the PRL, which was calculated as the CGT paid late, plus 10% of the unused loss balance of £10.7m. Fry successfully argued that there was no reasonable prospect of using the balance of the loss, so the penalty should be reduced from £163,192 to £5,183.
Our office can help you check whether penalties for tax return mistakes can be challenged or reduced.
Written by the Tax Advice Network