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HMRC internal manual

Compliance Operational Guidance

Supporting Guidance: employer compliance: guidance by subject: penalties: types of penalty

Any penalty sought by HMRC must have its basis in legislation. The legislation will specify the type of offence which may result in a penalty and will set down how the penalty will be calculated.

You must identify

  • the penalty offence that has been committed,
  • the appropriate penalty and,
  • calculate the amount of penalty to be sought.

In any cases of doubt or difficulty, or where guidance specifically mentions it,

  • advice should be sought from Tax Administration Litigation & Advice or see COG904770.

In general terms a penalty can be sought where an employer or contractor

  • fails to do so something which the law states they must do - failure penalties, or
  • provides incorrect information, for example on returns to us because of neglect (EM5125) or serious evasion - error penalties.

Note: Where you have a situation where there is 2 or more tax geared penalties in respect of the same tax such as. S98A2(b) for over 12 months of lateness and S98A4 if the return is also incorrect when received, you should

  • refer to S97A of TMA 1970
  • see EM6062, and
  • consult TALA Liverpool in cases of difficulty.

Types of Penalty

Penalties are always stated to be in a certain amount; either a fixed or maximum amount whether they are failure or error penalties.

Fixed Penalties

Some penalties are of a fixed amount. For example where a P35 End of Year return is late the penalty which arises under S98A(2)(a) of TMA 1970 is a fixed amount per each month of lateness based on the number of individuals that should be on the return COG914045 - Failure to submit - First 12 months of lateness.

Some fixed penalties may be capped to the amount of tax/NIC due whilst others are not, but none are ever abated.

Maximum amount penalties

The maximum penalty is the difference between the amount payable if the return had been correct and the amount paid as shown on the return submitted incorrectly.

For example: Where it is found that an employer/contractor has submitted an incorrect End of Year or Monthly Return (COG914070 - Incorrect end of year returns, COG914300 - CIS Incorrect monthly returns) and a penalty arises under S98A(4) of TMA 1970. Legally the penalty can be 100% of the difference but an appropriate amount will be calculated using the Abatement Structure - COG914090.

Penalties calculated in this manner are also subject to Article 6 of the Human Rights Act - COG906050.

See also CH81000 onwards regarding penalties for inaccuracies under Schedule 24 FA 2007.

Maximum Penalty of a Set Amount

Some penalties are set at a maximum amount, for example the initial and daily penalties arising under S98(1) of TMA 1970. An initial penalty (not exceeding £300) can be charged followed by a daily penalty (not exceeding £60) for every day thereafter the failure continues. One penalty offence that attracts such a penalty is where a contractor fails to make a declaration on a CIS300 monthly return - COG914280.

The initial penalty must be determined by the First- Tier Tribunal - COG914185. Any subsequent daily penalties can be determined by a local Grade 6 Officer - COG914190.

Another penalty that is set at a maximum amount is where returns of expenses and benefits made to employees (form P11D) are incorrect due to fraud or neglect - COG914080. The maximum penalty is £3,000 per incorrect return but you should consider all of the circumstances of what went wrong and usually abate the maximum penalty to an appropriate amount.

Tariff Based Penalties

Some penalties are tariff based. This means that the amount of the penalty increases depending on the number of times a penalty offence is committed.

Example 1: A form CIS300 (Construction Industry Return) that is more than 12 months late has a maximum penalty of £3,000 - COG914295. The penalty sought is tariff based and will increase if and as subsequent offences occur i.e. we will seek a lower penalty the first time it happens but the level of penalty will be higher for each subsequent return that is over 12 months late.

Penalties for Student Loan Deductions and excess tax credit funding are calculated in the same way.

Example 2: False registration for payment under deduction or for gross payment status within the CIS has a maximum s72 penalty of £3,000 - COG914260. The penalty sought is tariff-based and is dependent on the number of tests and we would be within 15 months of S98A being completely time-barred. 

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Recovery of Penalties

In most cases you should include any penalty in a contract settlement with the employer/contractor. If a contract cannot be agreed or is not appropriate formal action should be taken - COG914175. If formal action is taken, the employer/contractor can appeal to the Tribunal against the penalty in the same way he can against any formal determination of tax or decision for NICs for example.