CH404450 - Charging penalties: interaction between penalties: details and examples: an inaccuracy penalty is payable after automatic tax geared failure to file penalties have been charged
If you find an inaccuracy in an income tax or CIS return that was filed over 6 months late, you will need to make an adjustment to the inaccuracy penalty calculation to deduct the amount of the 6 month tax geared failure to file penalty that will be assessed automatically by the SA or CIS systems in respect of the additional liability when you amend the return.
If the return was 12 months late, you will also need to deduct the automatic 12 month tax geared penalty.
The 6 month tax geared penalty is assessed at the minimum of £300 when a return is 6 months late and another £300 penalty is assessed when the return is 12 months late.
When a return is filed, these penalties are recalculated at 5% of the tax liability declared in the return and further assessments are issued unless the £300 already assessed is more than 5% of the tax liability.
When you amend a return or issue a discovery assessment the automatic failure to file penalties are recalculated again to include the additional liability and further assessments are issued.
The inaccuracy penalty must be reduced by the amount of the failure to file penalty automatically assessed on the additional liability that you found during the compliance check.
Guidance on how to make the reduction is at CH407720.
Note: You must ensure that the NPPS2 is dated and issued after the date of the automatic further failure to file assessments. These may be issued up to 10 days after the return is amended or the discovery assessment is issued.
Example 1
Ryan did not file his 2009-10 income tax return until 30 June 2012. As this was 15 months after the filing date Ryan has incurred the following tax geared failure to file penalties
| Penalty calculation | Amount |
|---|---|
| 6 month penalty 5% of £19,000 | £950 |
| 12 month penalty 5% of £19,000 | £950 |
| Total automatic tax geared penalties = | £1,900 |
Ryan’s income tax return is subsequently selected for a compliance check. You discover an inaccuracy in the return with Potential Lost Revenue of £9,000. When Ryan’s self assessment return is amended the following revised automatic penalties are added to the self assessment statement.
| Penalty Calculation | Amount |
|---|---|
| Further 6 month penalty 5% of £28,000 (£19,000 plus £9,000) less £950 already charged - 5% x £28,000 = £1,400 less £950 | £450 |
| Further 12 month penalty 5% of £28,000 (£19,000 plus £9,000) less £950 already charged - 5% x £28,000 = £1,400 less £950 | £450 |
| Further automatic tax geared penalties - £2,800 less £1,900 | £900 |
You establish that the inaccuracy penalty is 45% following reductions for disclosure.
The inaccuracy penalty is 45% of £9,000 = £4,050.
You reduce the inaccuracy penalty by £900, which is the total of the two further automatic tax geared penalties for failure to file on time.
Example 2
Saeed did not file his 2010-11 income tax return which was issued to him on 8 April 2011, with a filing date of 31 January 2012. You receive details from RIS of third party information about a capital gain of £4,000.
You contact DMB and arrange for a Revenue determination in the sum of £25,000 to be issued to Saeed on 1 February 2013. This is calculated using the liability declared on his previous returns, see CH401225. Saeed receives the following automatic tax geared failure to file penalty.
| Penalty calculation | Amount |
|---|---|
| 6 month penalty 5% of £25,000 | £1,250 |
| 12 month penalty 5% of £25,000 | £1,250 |
| Total automatic tax geared penalties = | £2,500 |
Saeed pays the amount requested in the determination and the penalties.
You commence a compliance check into the missing return 30 days after the determination, see CH401225. Saeed subsequently submits his income tax return which shows the actual liability for 2010-11 of £29,000. The following revised automatic penalties are added to the self assessment statement.
| Penalty calculation | Amount |
|---|---|
| Further 6 month penalty 5% of £29,000 less £1,250 already charged - 5% x £29,000 = £1,450 less £1,250 | £200 |
| Further 12 month penalty 5% of £29,000 less £1,250 already charged - 5% x £28,000 = £1,460 less £1,250 | £200 |
| Further automatic tax geared penalties = £2,900 less £2,500 | £400 |
During the compliance check you are unable to establish that Saeed deliberately withheld information. Instead a penalty for the failure to notify an under assessment within 30 days is payable. This penalty must be reduced by the amount of the further tax geared penalties already charged.
You establish that the failure to notify an under assessment penalty will be 15% less the further tax geared penalties.
| Penalty calculation | Amount |
|---|---|
| Failure to notify an under assessment penalty £4,000 x 15% | £600 |
| Further automatic tax geared penalties | 400 |
| Adjusted under assessment penalty | £200 |
Example 3
Mary failed to file her 2011-12 income tax return and received a £300 penalty assessment when it was 6 months late.
Mary filed her return on 31 July 2013. The return was for £3,000. No additional failure to file penalty was assessed because the £300 assessed when the return was 3 months late is more than 5% of the tax declared on the return.
The return is referred to you for an aspect enquiry and you establish a careless inaccuracy of £2,900 and amend the return. This will not result in an additional failure to file penalty assessment because the £300 assessed when the return was 3 months late is still more than 5% of the total of the tax declared and the additional liability.
As the additional tax liability does not increase the failure to file penalty there is no interaction or adjustment to be made.
Example 4
Oliver failed to file his 2011-12 income tax return and received a £300 penalty assessment when it was 6 months late.
Oliver filed his return on 31 July 2013. The return was for £4,000. No additional failure to file penalty was assessed because the £300 assessed when the return was 3 months late is more than 5% of the tax declared on the return.
The return is referred to you for an aspect enquiry and you establish a careless inaccuracy of £2,900 and amend the return.
This results in a further 6 month failure to file penalty of 5% of £6,900 (£4,000 plus £2,900) = £345 less £300 already charged = £45.
You establish that the inaccuracy penalty is 25% of £2,900 = £725.
Therefore the inaccuracy penalty to be charged is £725 less £45 = £680.