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HMRC internal manual

Compliance Handbook

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HM Revenue & Customs
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Charging penalties: company officer's liability to pay a penalty: calculating the penalty for each liable officer

The proportion of the company penalty that each officer is liable to pay will depend on the circumstances of the case.

Calculating the amount to be apportioned to each liable officer can never be an exact science but you must follow the guidance below as closely as possible. The way you calculate the liability will depend on whether the liable officer or officers gained or attempted to gain personally, or whether the company is, or is likely, to become insolvent.

The liable officer or officers gained or attempted to gain personally

Under these circumstances you must establish, to a reasonable degree of accuracy, the amount each liable officer gained or attempted to gain personally, and compare this with the total gain upon which the Potential Lost Revenue, see CH82150+ for the penalty is based.

If the total gain or attempted gain by the liable officer or officers is equal to or exceeds the amount of the actual gain by the company, then the amount of the total penalty should be pursued from the liable officer or officers. You must calculate the amount you apportion to each liable officer as the ratio of their gain or attempted gain to the aggregate of the total gain or attempted gains by all of the liable officers.

If the total gain or attempted gain by the liable officer or officers is less than the amount of the actual gain by the company as a result of the inaccuracy, only a proportion of the total penalty should be pursued from the liable officer or officers. You must calculate the amount you apportion to each liable officer as the ratio of their gain or attempted gain to the actual gain or potential gain by the company that resulted from the inaccuracy, failure or wrongdoing. Under these circumstances the company will still have to pay some of the penalty.

Example

All three directors of a company, Tam, Mohammed and Becky, were responsible for a deliberate inaccuracy resulting in a tax loss and potential lost revenue (PLR) of £100,000. The caseworker decides that the penalty on the company is 50% of £100,000 or £50,000. As a result of the inaccuracy

  • Tam gained £30,000
  • Mohammed gained £10,000
  • Becky gained £60,000.

Because the aggregate of the officers’ personal gains (£100,000) is greater or equal to the total gain, the officers are liable to pay the entire £50,000 penalty between them. Tam’s proportion is 30%, Mohammed’s is 10% and Becky’s is 60%. These percentages are then applied to the penalty so Tam is liable to pay £15,000, Mohammed is liable to pay £5,000 and Becky is liable to pay £30,000.

However, if the total gain or attempted gain by the three directors is less than the total gain, for example

  • Tam gained £10,000
  • Mohammed gained £10,000
  • Becky gained £20,000

the three directors will not under these circumstances be liable to pay the entire penalty. Now, Tam’s proportion of the gain or attempted gain is 10%, Mohammed’s is 10% and Becky’s is 20%. The company gained by 60%. These percentages are then applied to the penalty in order to calculate the amount they are each liable to pay. In this example, Tam is liable to pay £5,000, Mohammed £5,000 and Becky £10,000. The company must pay the remaining £30,000.

Note that the liable officers’ gains or attempted gains do not have to relate directly to the company’s gain. For example, some reduction of turnover may have taken place to lower the value of the company and its shares for a management buyout by one or more company officer. The gain by the company will be a reduction in tax but the gain by the liable officer or officers will be the decrease in the value of the company shares that they purchase during the takeover.

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The company is or is likely to become insolvent

Where you believe a company is or is likely to become insolvent, see CH84645 and CH75610.

Under these circumstances divide the penalty equally between the liable officers.

For example, where the company is liable to a penalty of £4,000 (say 40% of £10,000) and the deliberate behaviour is attributable to two officers, each officer is liable to pay £2,000. The degree to which each liable officer gained or attempted to gain (if at all) is not taken into consideration.

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In all cases where you have decided that one or more officers are liable to pay all or part of the penalty

Each liable officer should be told that they are liable to pay a portion of the penalty, see CH84665 and CH406300. You should not pursue payment of an increased proportion of the penalty from one officer simply because of non-payment by another.

Remember that the penalty is assessed on the company. If the company chooses to pay the entire penalty, that is the end of the matter. We cease our pursuit of the sums apportioned to the liable officers.

Where Debt Management has considered all appropriate recovery options in relation to the amount of a penalty that has been apportioned to an officer they will revert to collecting the apportioned penalty from the company.

FA07/SCH24/PARA19