Tax disclosure penalties

Where a taxpayer fails to notify HMRC of their tax liability, or makes an error (careless or deliberate) in a tax return, HMRC can charge the taxpayer a penalty. This is calculated as a percentage of the potential lost revenue (PLR).

There are statutory bands set for the range of penalties that apply to each type of behaviour, which vary according the way in which the error is disclosed. For example, where the taxpayer makes an unprompted disclosure of a careless error the penalty can range from 0% to 30% of the PLR.

If the disclosure was prompted by HMRC the penalty can range from 15% to 30% of the PLR. Where the final penalty sits in that range depends on the quality of the disclosure, which has three elements: telling (30%), helping (40%), and giving access (30%). The amounts in brackets are the percentage by which maximum possible penalty is reduced within the statutory range. Each of those elements is judged by HMRC according to its timing, extent and nature.

Timing is a key part of quality. HMRC view disclosure of an error reported 12 months after it occurred as being a higher quality of disclosure than where the same error is reported a “significant period” after it occurred. HMRC has now decided to place limit of three years on the measure of “significant period”.

If the error is reported within three years, the maximum mitigation of the penalty is possible. If the error is reported three years or more after it occurred, the minimum penalty is effectively increased by 10 percentage points. For an unprompted disclosure of a careless error this would mean the minimum penalty would be 10%, and the minimum penalty for a prompted disclosure would be 25%.

This change in HMRC practice applies for all disclosures made from September 2017 onwards, but the compliance factsheets have only just been amended to include the new condition. However, it is not clear exactly when the three-year period starts from; the date of the error, when it was noticed by the taxpayer, or the end of the tax year/ accounting period containing the error.

It is important for clients to make disclosures as soon as is practical, as a delay which take you outside the three year period could cost you a further 10% in penalties.

Written by the Tax Advice Network