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HMRC internal manual

Compliance Handbook

Charging penalties: introduction: inaccuracies - old and new penalties

To check the commencement dates for the new penalties under FA07/Sch24 go to CH81011 and select the appropriate link for the tax you want.

Within one compliance check you may need to calculate penalties under both the old and new penalty legislation. If you are checking more than one tax period and they straddle the dates of change you must apply the correct legislation to each period. You should consider the filing date for the document in which the inaccuracy occurred and apply the appropriate penalty legislation to the whole of that tax period, see CH81030 about tax periods.

For example, you may agree with a person that the behaviour that led to an inaccuracy in an income tax period to which a Sch24 penalty applies was careless because they failed to take reasonable care. If you find similar inaccuracies in earlier tax periods that fall within TMA70/S95 you may find that these were as a result of the person’s negligence.

Note: that from 1 April 2010 TMA70/S36 has changed from covering fraudulent or negligent conduct to a loss of tax brought about carelessly or deliberately.

The framework for calculating penalties under the old legislation is different to that for FA07/Sch24 penalties and so the legislation has to be applied strictly. You should resist any suggestion from the person or their agent to apply a common penalty rate or amount covering all tax periods.

Example 1

Your check into Ricky’s income tax returns for the tax years 2009-10 and 2008-09 reveal careless inaccuracies and additional tax liability. These inaccuracies occurred within documents with a filing date and covering tax periods where Sch24 penalties apply. After you agree Ricky’s behaviour and the quality of his disclosures the Sch24 penalties are calculated at 22%.

You also discover that Ricky has been negligent in 2007-08. The TMA70/S95 penalty has to be calculated taking account of disclosure, co-operation and seriousness. Having done this, you find the penalty loading for the S95 penalty is 40%.

You must apply the 22% penalty percentage to the 2008-09 and 2009-10 potential lost revenue and the 40% penalty loading to the 2007-08 tax difference.

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Example 2

Your check into Mark’s VAT return for the quarter ending 31 December 2008 reveals an inaccuracy that results in an additional tax liability. The inaccuracy occurred within a tax period before a Sch24 penalty applies. The error exceeds 30% of the gross amount of tax (output tax plus input tax) properly due, so a penalty is triggered under VATA94/S63. This penalty will be charged at 15% of the lost tax. This penalty may be reduced to take account of mitigating circumstances and you will need to consider whether Mark has a reasonable excuse, see VCP11700.

You also check Mark’s return for the quarter ending 31March 2009 and find a similar but smaller error in that return. This tax period falls under the Sch24 penalty legislation. You must consider Mark’s behaviour, the type of disclosure and reductions for his quality of disclosure. For a careless inaccuracy, a prompted disclosure could be reduced from 30% to 15% by giving the full reduction for telling, helping and giving access.

Schedule 24 penalties must be authorised in accordance with the guidance at CH407740, while predecessor penalties are authorised in accordance with earlier arrangements.

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