EM2168 - Working the enquiry: partial closure notices: calculating penalties

The effect of a partial closure notice (PCN) is to settle and provide finality to a particular matter or matters. This includes settling the penalty position where the PCN corrects a careless or deliberate inaccuracy.

For 2008-09, inaccuracy penalties are charged under FA 2007 Schedule 24. This legislation includes rules for calculating the Potential Lost Revenue (PLR). Normally on completion of an enquiry to settle all matters the PLR is calculated under

  • FA2007 Schedule 24 paragraph 5 where there is a single inaccuracy, see CH82160
  • FA2007 Schedule 24 paragraph 6 where there is more than one inaccuracy see CH82180

Issuing PCNs in a case can create some complexities where there is more than one inaccuracy (‘multiple inaccuracies’). The guidance below sets out how to approach the calculation of penalties in these circumstances.

Calculating penalties where there is more than one inaccuracy

The amendment to the return required by the issue of a PCN is treated as a snap-shot in time. That means the tax and any penalties relating to any inaccuracies corrected by the PCN should be calculated on the information that you know at that time.

When issuing a PCN you should calculate the potential lost revenue (PLR) depending on the number of inaccuracies corrected by that PCN. Where there is

  • a single inaccuracy corrected by the PCN, CH82161 has examples of calculating the PLR
  • more than one inaccuracy corrected by the PCN, CH82250 has guidance on calculating the PLR

Penalties for any inaccuracies corrected by subsequent PCNs should be calculated on the same basis. You should not take into account penalties

  • already charged following earlier PCNs
  • potentially chargeable when further inaccuracies are corrected by subsequent PCNs or a final closure notice (FCN).

This approach to calculating penalties each time you issue a PCN could mean that the total penalties charged are less or greater than the total penalties that would otherwise have been charged if all inaccuracies had been corrected at the same time by a FCN.

Action at FCN stage

At the FCN stage you must recalculate the overall penalty position by applying the ‘multiple inaccuracy rules’ to all of the inaccuracies corrected by the enquiry. Guidance on the multiple inaccuracy rules is at CH82250+.

Applying the multiple inaccuracy rules means that the taxpayer will be charged a penalty based on the correct PLR calculated for the enquiry as a whole.

Earlier years

For years up to and including 2007-08, incorrect return penalties did not have statutory rules for the order in which inaccuracies are corrected. So this guidance doesn’t apply for those years. For those years you should charge penalties in the usual way for each PCN or FCN issued.