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HMRC internal manual

Compliance Handbook

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HM Revenue & Customs
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The Human Rights Act and Penalties: HMRC penalties

We accept that some HMRC penalties are ‘criminal’ for the purposes of Article 6. This classification as ‘criminal’ is for the purposes of European Convention on Human Rights (ECHR) only. It does not make them criminal for domestic purposes. They remain civil penalties.

A number of court cases have established the principle that penalties based on the whole of the tax unpaid are punitive and deterrent in nature. Therefore, even though there is no possibility of a criminal charge, the penalties are ‘criminal’ for the purposes of Article 6 of the ECHR.

This means that we must not breach the person’s rights under Article 6, see CH300100.

Penalties fall into two categories

Penalties that we accept or treat as ‘criminal’ for Article 6 purposes

We accept that penalties are ‘criminal’ for Article 6 purposes where the maximum potential penalty is 70% or more of the amount we use to calculate the penalty see CH300300.

The amount we use to calculate the penalty includes all of the following

  • the tax difference
  • the potential lost revenue
  • the tax, NIC or duty unpaid
  • the tax, NIC or duty understated
  • the tax, NIC or duty over-claimed
  • the tax, NIC or duty under-assessed
  • the tax liability, or liability to make payment, that should have been shown on a tax return.

Throughout this section of the Compliance Handbook we refer to the items above as either the ‘amount used to calculate the penalty’ or ‘the tax understated, unpaid, or over-claimed’. Tax, NIC or duty, are simply refered to as ‘tax’

In practice the final penalty may be based on a maximum penalty of less than 70% but you are unlikely to know this when you start to discuss penalties or the reason for the inaccuracy, failure, wrongdoing or reason for withholding information. The potential penalty must therefore be treated as if it is ‘criminal’ for Article 6 purposes, even though the final penalty percentage charged may not be.

For example, you believe that a Schedule 24 penalty may be due because the person did not take reasonable care to complete a tax return. Although the maximum penalty for a careless inaccuracy is 30%, the maximum penalty for a Schedule 24 penalty could be either 70% or 100% depending on the behaviour. Because you cannot be certain about the behaviour until you start to ask the relevant questions you must treat the penalty as if it is ‘criminal’. Even if the final penalty is 30% or less, it must be treated as ‘criminal’ from the start.

The type of HMRC penalties that fall within Article 6 include

  • error penalties charged under TMA70/S95, FA98/SCH18/PARA20 and the penalties in FA07/SCH24/PARA1 and PARA1A with a maximum penalty percentage rate of 70% or more
  • failure penalties charged under TMA70/S7(8), TMA70/S93(5) and penalties in FA08/SCH41/PARA1 with a maximum penalty percentage rate of 70% or more
  • civil evasion penalties charged under VATA94/S60
  • penalties for VAT and Excise wrongdoings charged under FA08/SCH41/PARA2 - 4 with a maximum penalty percentage rate of 70% or more
  • late filing penalties for withholding information charged under FA09/SCH55/PARA6 and PARA 11, with a maximum percentage rate of 70% or more.

CH300400 explains what you must do when you have reason to believe that a person may be liable to one of these penalties.

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Other Penalties that we do not accept are ‘criminal’ for Article 6 purposes but where we believe it is still good practice to issue the HRA factsheet CC/FS9

We do not accept that any other HMRC penalties are subject to Article 6 of the ECHR.

This means that the majority of tax-geared penalties (but not fixed penalties) must be treated as if they are subject to Article 6 ECHR because the maximum penalty percentage rate could be 70% or more.

Penalties under Para 2 of Schedule 24 FA07 are an exception. The maximum tax geared penalty chargeable is 30%. Although we do not accept that this maximum penalty is ‘criminal’ for Article 6 you will still need to explain at an early stage the basis of the penalty, the reductions available for disclosure and issue factsheet CC/FS7 (GOV.UK) - Penalties for not telling us about an under-assessment. It is therefore good practice to issue factsheet CC/FS9 (GOV.UK) - The Human Rights Act and Penalties, at the same time.

For this category of penalty, it is not necessary to follow the procedure at CH300600. It is sufficient to tell the person that the factsheet explains their rights when we are considering penalties. If you are in a meeting with the person, you should hand them factsheet CC/FS9 (GOV.UK) before the other factsheets and give them the opportunity to read it, noting any response, before you proceed. Otherwise, you should send a copy of factsheet CC/FS9 (GOV.UK) to the person and simply draw their attention to all the relevant factsheets you have issued with any covering letters.

If, later in your compliance check, you have reason to believe that the person may be liable to another penalty that is potentially ‘criminal’ within Article 6 you should reinforce the HRA message by following the procedure set out at CH300600.

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)