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HMRC internal manual

Compliance Operational Guidance

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HM Revenue & Customs
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Supporting guidance: employer compliance guidance by subject: employment related securities: penalties: serious error

An error is considered ‘serious’ if there has been a fundamental or material error in the plan rules or the way in which the scheme is operated. This would include something that cannot be put right by either amending or repairing the plan rules.

An example of a serious error might be where the plan shares are not, and never were, eligible shares, or where the company was never eligible to operate the scheme.

In addition to any penalty, the tax advantaged status will be withdrawn from the date specified in the closure notice, or the date of the closure notice.

Note: the specified date is normally the date of the closure notice unless exceptional circumstances apply, see COG945370.

Where you have decided that the error is serious, the company is liable to a maximum penalty of up to twice the amount of tax and NICs relief given or due on options or awards granted to participants:

  • before the date of the closure notice or the specified date in the closure notice, and
  • when the scheme did not meet the requirements for tax advantaged status.

 

Note: This is a reasonable estimate of what would have been payable if the scheme had not been operated in a tax advantaged way during the period between the date when the serious error commenced and the date of the closure notice.

A minimum penalty must be applied.  This will be the total of the income tax and NICs which HMRC estimates would have been payable if the scheme had not been operated in a tax advantaged way during the period between the date when the serious error commenced and the date of the closure notice.

When determining the amount of the penalty you must consider whether the disclosure was prompted or unprompted, see CH82420.

The penalty should be calculated as follows:

Unprompted disclosure - the maximum 200% penalty will be reduced to 100% (see Example 1).

Prompted disclosure - the maximum penalty will be reduced to 150% (see Example 2).

No disclosure - the penalty will remain at the maximum of 200%.

Note: For exceptional cases a minimum penalty will not apply because we are respectively recovering the tax and NIC liability due from the company, see COG945370. You should explain how this affects the calculation of the penalty to the company (see Example 3).

Example 1

You have decided the error is serious and disclosure is unprompted. You have calculated the amount of tax and NICs relief given in the sum of £50,000.

The penalty is based on twice the amount of tax and NICs relief, so in this example the penalty would be.

200% of the amount of tax and NICs relief = £100,000

less unprompted disclosure of 100% of the amount of tax and NICs relief = £50,000

Penalty due = £50,000

 

Example 2

You have decided the error is serious and disclosure is prompted. You have calculated the amount of tax and NICs relief given in the sum of £50,000.

The penalty is based on twice the amount of tax and NICs relief, so in this example the penalty would be.

                200% of the amount of tax and NICS relief = £100,000

                less prompted disclosure reduction of 50% of the amount of tax and NICs relief  - £25,000

                Penalty due = £75,000

Example 3

You have decided the error is serious. You have calculated the amount of tax and NICs relief given in the sum of £50,000.

The exceptional circumstances in COG945370 apply and we have recovered the tax and NICs from the company.  The penalty is based on 100% of the tax and NICs recovered.

If the disclosure is prompted, the penalty will be reduced by 50% of the tax and NICs recovered:

                100% of the amount of tax and NICs relief = £50,000

                less prompted disclosure reduction of 50% of the amount of tax and NICs relief   = £25,000

                Penalty due = £25,000

If the disclosure is unprompted, the disclosure reduction will be 100%

                100% of the amount of tax and NICs relief = £50,000

                less unprompted disclosure of 100% of the amount of tax and NICs relief  = £0

                Penalty due = £0

How to raise the penalty

Penalties must be authorised by your Authorising Officer using the TASS AO report form (available in SEES), see COG945360.

The Authorising Officer will

  • consider the information provided
  • authorise the penalty (if appropriate)
  • refer the papers back to you.

 

Once the penalty has been authorised, see COG945360, you must write to the company:

  • confirming an error has been found
  • confirming the decision on the penalty notice.

You should then raise the penalty. This will either be by formal assessment or can be included in a contract settlement if it is more cost effective and administratively convenient to do so, see CH411050.

When proceeding to raise a formal penalty assessment:

  • prepare the Penalty Notice and Schedule (available via SEES Forms and Letters)
  • email the stencil, penalty notice and schedule to the SAFE officer who will create the charge on SAFE using the charge type ERS other return related pens and return the stencil to you advising the SAFE reference
  • use the SAFE reference to create a payslip
  • issue the payslip, notice of penalty assessment and penalty schedule
  • set 30 day BF for appeal period.

 

Appeal not received

If no appeal is received, you can close the case.

Appeal received

An appeal must be made within 30 days of the closure notice, default notice or notice of assessment of the penalty. Appeals should be made in writing.

On receipt of an appeal you should prepare a summary of the position to include:

  • Details of the error – include copy of closure notice and penalty notice
  • Calculation of tax and NICs relief given or due
  • Penalty calculation
  • Clarification of whether disclosure is prompted or unprompted

 

You should send the appeal to ESSU for consideration by email to Shareschemes, SPT (Specialist PT ESSU) .