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Last Friday Blog – Understanding the HMRC Penalty Regime

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The current HM Revenue and Customs (HMRC) penalty regime came into play on 1 April 2009 and was drawn up with the aim of encouraging people to take more care when submitting tax returns and other documents, as well as deterring deliberate under-assessment of tax liabilities.

The rules, which apply to income tax, corporation tax, capital gains tax, VAT, PAYE, national insurance contributions and the Construction Industry Scheme (CIS), mean individuals and business owners can now face penalties of up to 100% for deliberately underpaying tax.

Reasonable care

In introducing this regime, HMRC has changed the emphasis of the penalty calculation by linking the behaviour giving rise to the error to this calculation. This does not change the fact that HMRC will always charge penalties for incorrect returns or documents.

If HMRC deem any error in calculating the amount of tax to be paid as deliberate, then the penalty will increase accordingly. Should the taxpayer actively try to hide the error then the penalty will increase further still.

However, HMRC state that if “reasonable care” has been made to pay the correct amount of tax and an error has still been made the penalty will be reduced.

HMRC further add that taxpayers are expected to keep sufficient records for them to accurately calculate their tax payments. If individuals or businesses are unsure about any aspect of the taxation system, they must be able to show that they have sought specialist advice.


Penalties are levied on the basis of a percentage charge of any additional tax due. The charge increases based on how poor HMRC deem the behaviour to be:

  • No penalties apply if “reasonable care” has been taken
  • Up to 30% for “careless behaviour”
  • Up to 70% for “deliberate mistakes”
  • Up to 100% for “deliberate and concealed mistakes”

Penalties can be suspended for up to two years in cases where “reasonable care” has been taken, if certain conditions are met. These conditions do not include meeting all notification and filing obligations but do include conditions such as meeting with your agent on a regular basis to discuss your tax affairs and ensuring that notes of these meetings are taken.

An example in practice

The above penalty system was implemented in respect of a recent client that we had inherited.

The taxpayer had incorrectly reported his capital gains tax position in respect of the sale of his business on his tax return. A substantial amount of additional tax was found to be due upon enquiry made by HMRC.

A penalty of £85,000 was issued by HMRC for carless behaviour upon conclusion of the enquiry.

We appealed the penalty by setting out conditions for the taxpayer to meet in order to have the penalty suspended and it was significant that we quoted the recent Eastman [2016] TC 05276 case as a precedent to be followed.

This case involved a taxpayer, Mr Eastman, who had sold his share of his company and then sold his share of the company premises shortly afterwards. The capital gains tax for both disposals was computed by his accountant but the disposal of the company premises was omitted from Mr Eastman’s tax return and he failed to spot the omission. HMRC issued a penalty on the basis that Mr Eastman had not taken reasonable care and refused to suspend the penalty on the basis that no suspension conditions could be put into place. Mr Eastman appealed the decision and won his appeal with the First Tier Tribunal stating that HMRC’s decision not to suspend the penalty was flawed in a judicial review sense and that Mr Eastman should be afforded a means of double checking that all relevant material was available to ensure that he could file an accurate tax return and that any deficiencies could be uncovered before the tax return was filed.

HMRC accepted our appeal and agreed that there were achievable conditions that could be set. As a result the penalty has been suspended for two years.

Each case will be judged on its own merits, but the above example demonstrates that HMRC will afford an opportunity to a taxpayer to demonstrate better behaviour in future without imposing a penalty. A significant penalty can be therefore be suspended by HMRC by putting forward some sensible conditions for the taxpayer to meet.

If you have queries about the penalties scheme or any tax-related questions – on an individual basis or as a business – do get in touch with your usual BHP contact and we’ll be able to help.