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HMRC internal manual

Compliance Handbook

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HM Revenue & Customs
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Penalties for inaccuracies: how to process the penalty: the timing of penalty assessments

You must check the date from which these rules apply for the tax or duty you are dealing with. See CH81011 for full details.

When you should assess a penalty

To make sure that we comply fully with the ruling in the case of King v UK, see CH301100, and meet the objectives of the tribunal when dealing with appeals, you must always try to issue any penalty assessments at the same time as, or as soon as possible after, the tax assessments are issued.

This will give the person the option of having any reviews or appeals against the tax and penalty decisions considered together and avoid duplication of effort and costs by everyone involved. Cases will also be managed more efficiently by both our Appeals and Review units and the tribunal as a result.

It is recognised that there will be circumstances when this is not possible. For example, when

  • dealing with VAT pre-repayment credibility checks
  • we have to issue a tax assessment within specific time limits but have not been able to establish whether a penalty is due, or
  • it is not possible to decide whether a penalty is due until the related tax decision has been determined.

This is not an exhaustive list and there may be other circumstances depending on the particular facts.

Statutory time limits for penalty assessments

When you cannot issue the penalty assessment at the same time as the tax assessment you must always be aware of the statutory time limits for penalty assessments, these are explained below. Before these time limits expire you must issue any best estimate penalty assessments that are required based on what information you do hold.

A contract settlement following a compliance check is equivalent to raising a penalty assessment. No penalty assessment is required because the agreed tax and penalties are included together in the contract settlement, see EM6000+.

Schedule 24 imposes the following statutory time limit for penalty assessments.

A penalty assessment may be made up to 12 months after either

  • the end of the period during which the person can appeal against our correction of an inaccuracy or under-assessment, or
  • the time when an appeal against our correction of an inaccuracy is finally decided or the person withdraws it.

Where a person puts right the inaccuracy or under-assessment before we have discovered it, for example by an amendment to an SA return, you must tell the person about the penalty by sending a penalty assessment within 12 months of the date the correction was made.

Where an assessment is not needed to put right the inaccuracy or under-assessment you must tell the person about the penalty within 12 months of the date on which the inaccuracy is put right.

However, in practice you must issue the penalty assessment at the earliest opportunity and not wait until the statutory penalty assessing time limit is about to expire.

How time limits may apply in practice - examples

Example 1 - direct tax

A reduction in a loss claim may not reverse the entire loss. But even though there is still no tax to pay, a penalty may still be payable.

  • Seek authorisation to issue a penalty assessment, see CH409000+, then
  • issue the decision letter for the tax decision and the penalty assessment together, see ARTG2190.
  • If you have not explained how the penalty is calculated in a Penalty Explanation Letter (form NPPS100) you should send an explanation of how you arrived at the penalty with the decision letter for the tax decision.

Example 2 - indirect tax

A correction may be made by putting right a repayment return through a credibility check where a tax assessment is not issued. You must process the amended claim once verified and then without delay tell the person whether or not we are considering penalties. If we are seeking penalties, once we have sufficient information

  • explain our view of the penalty position using a Penalty Explanation Letter (form NPPS100) and wait 30 days, then
  • seek authorisation to issue a penalty assessment, see CH409000+, then
  • issue the penalty assessment and a covering/separate letter explaining that if they disagree with the penalty and they have asked for a review of the related tax assessment, which has not yet been completed, they may ask for a review of the penalty assessment to be carried out at the same time. If they have notified their appeal against the related tax assessment to the tribunal, and they also wish the penalty to be heard by the tribunal, they can ask the tribunal to hear both appeals together.

FA07/SCH24/PARA13 (3) & (5)