Penalties: an overview for agents and advisers
Find out about the different types of HMRC penalties and how you can help your clients avoid them.
It’s in everyone’s interest to avoid penalties. Understanding how HM Revenue and Customs (HMRC) penalties work can help you to help your clients avoid them.
Each tax or duty has specific rules on penalties for late payment or filing. A penalty may also be due if your client doesn’t tell HMRC about a liability to tax at the right time.
A new penalty system for errors in tax returns and other documents was introduced on 1 April 2009. Its scope was widened from 1 April 2010. Your clients may be charged a penalty if their return or other tax document was inaccurate and tax has been unpaid, understated, over-claimed or under-assessed as a result. They may also face a penalty if they don’t tell HMRC that an assessment is too low. This guide provides an overview of penalties with links to more detailed information.
You and your client’s responsibility for penalties
When you are acting on behalf of a client, they still retain responsibility for their returns, calculations and payments.
Your authorisation as an agent allows HMRC to deal with you on your client’s behalf, but any liability for penalties for late returns, late payments or any errors on paperwork legally remains with your client.
Penalties for late filing or late payment
Penalties for late filing of returns and paperwork or late payment differ according to which tax you are dealing with.
Penalties for errors on returns, payments and paperwork
Penalties can be charged if there are errors on returns or other documents which:
- understate the tax
- misrepresent the tax liability
Penalties may also apply if your client doesn’t tell HMRC if an assessment is too low. This type of penalty is known as an ‘inaccuracy penalty’ and applies to the following taxes and duties:
- Betting and Gaming duties
- Capital Gains Tax
- the Construction Industry Scheme
- Corporation Tax
- Environmental taxes
- Excise Duties
- Income Tax
- Inheritance Tax
- Insurance Premium Tax
- National Insurance contributions
- Petroleum Revenue Tax
- Stamp Duties
If you or your client sends in a document that contains a mistake, HMRC will charge a penalty if the error is:
- because of a lack of ‘reasonable care’
- deliberate - such as intentionally sending incorrect information
- deliberate and concealed - for example, intentionally sending incorrect information and taking steps to hide the error
The level of the penalty is linked to the reason why the error occurred. The more serious the reason, the higher the maximum penalty can be. HMRC can reduce the penalty if you or your client help them to put things right.
What ‘reasonable care’ means
Every individual or business is expected to keep records that allow them to provide a complete and accurate return. HMRC also expects them to check with their agent, or HMRC, to confirm the correct position, if they are not sure.
However, ‘reasonable care’ is different according to each client’s circumstances and abilities. For example, a client with relatively straightforward tax affairs may only need a simple system of record keeping that is regularly updated. A large business with complex tax affairs is expected to have a more sophisticated system that is well-managed.
How the inaccuracy penalty is calculated
If a penalty arises because of a lack of reasonable care, the level of the penalty will depend on the reasons for the error and the potential lost revenue (PLR). The PLR is an additional amount of tax which is due or payable as a result of correcting the inaccuracy.
- if a penalty arises because of a lack of reasonable care, the penalty will be between 0% and 30% of the extra tax due
- if the error is deliberate, the penalty will be between 20 and 70% of the extra tax due
- if the error is deliberate and concealed, the penalty will be between 30 and 100% of the extra tax due
The penalty can be reduced if you or your client tells HMRC about the error. HMRC may make further reductions depending on the quality of the disclosure. Penalties can be reduced by:
- telling HMRC about the errors
- helping HMRC work out what extra tax is due
- giving HMRC access to check the figures
Failure to notify penalty
If your clients don’t tell HMRC when changes happen that affect their liability to tax, VAT, or other duties, they may face a penalty. This is known as a ‘failure to notify’ penalty.
A penalty may occur, for example if your client doesn’t tell HMRC, at the right time, that:
- they are liable to tax because their new business has made a profit
- their company is liable for Corporation Tax
- their business turnover has reached the VAT registration threshold
- they sell an asset and make a capital gain on which tax should be paid
- they start a type of business that must register with HMRC - for example a business that will charge Excise Duty
- their circumstances change in a way that affects their tax position
This penalty is calculated on PLR which is based on the amount of tax or duty that is unpaid as a result of the failure to notify. HMRC can reduce the penalty if your client tells them about the failure. Further reductions may be made depending on the quality of disclosure in a similar way to the inaccuracy penalty. See the section above for more information.
From 6 April 2011 HMRC can charge an increased penalty where an inaccuracy penalty, or a failure to notify penalty, arises and the income or asset that gives rise to the penalty is held outside of the UK. The penalty for failing to submit a return for 12 months can also be increased where offshore assets or income are involved. The level of the penalty depends on how readily the foreign jurisdiction shares information with the UK and only applies to Income Tax and Capital Gains Tax.
VAT and Excise wrongdoing penalty
From 1 April 2010 HMRC will charge a penalty known as a wrongdoing penalty if your client:
- issues an invoice that includes VAT which they are not entitled to charge
- handles goods on which Excise Duty has not been paid or deferred
- uses a product in a way that means more Excise Duty should have been paid
- supplies a product at a lower rate of Excise Duty knowing that it will be used in a way that means a higher rate of Excise Duty should be paid
This penalty applies to anyone registered for VAT or Excise, anyone who should be registered to pay VAT or Excise Duty and to other members of the general public.
This penalty is calculated in a similar way to the inaccuracy penalty. HMRC can also reduce it if your client tells them about the wrongdoing.
Helping your clients avoid penalties
As a tax agent and adviser, all of your actions will be geared towards avoiding problems and penalties.
You can give your clients more information about how the system works so they can consider if their record keeping arrangements and processes are adequate to produce accurate returns. Follow the link below to find an HMRC leaflet that may be useful.
It’s also a good idea to reinforce to your clients that if they have any questions about their tax and record keeping, they should check with you for advice.
If you would like to know more about how penalties work, you can use the HMRC staff Compliance Manual, which will continue to be updated.