EM4508 - Penalties: Introduction: How Penalties are Imposed

Guidance about contract settlements only relates to direct tax. You must never include VAT or VAT penalties in a contract settlement

You can impose and collect penalties in one of two ways:

  1. through formal statutory proceedings by making a penalty assessment or determination where the penalties are collected as if they are tax, or
  2. by bringing the penalties into a contract settlement, where the law of contract enables enforcement of the contract.

When you can reach an agreement with the taxpayer, the contract settlement route is administratively more convenient (cheaper in time, money and resources) than formal proceedings.

Formal proceedings and contract settlement are two routes to precisely the same outcome. The penalties (and any tax, NICs, interest and surcharges) to be included in an ‘expected offer’ are precisely the same as those we would otherwise take formal proceedings to impose and collect.

If you do not receive an acceptable offer, you must proceed formally.

When agreement cannot be reached most “old” penalties are formally determined under TMA70/S100(1), after being authorised by an Authorising Officer, see EM5200+.

There may be some occasions when a combination of a contract settlement and formal assessment are the most cost-effective way to settle a case.

Exceptions for penalties listed at TMA70/S100(2)

For any of the penalties listed at TMA70/S100(2), you must start proceedings before the tribunal. The tribunal is responsible for imposing a penalty under TMA70/S100C, see ARTG7540. The only common example of this procedure is the initial £300 maximum penalty, under TMA70/S98(1)(i). This would apply, for example where there is

  • a failure to make one of the specified returns, or
  • failure to comply with an information notice issued before 1 April 2009 under TMA70/S20.

From 1 April 2009 information notices are issued under FA08/Sch36, see CH20000+. Although your manager can impose the initial penalty, only an authorised officer, see CH270200, can determine a penalty not exceeding £60 for each day that the failure continues thereafter.