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HMRC internal manual

Enquiry Manual

HM Revenue & Customs
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Penalties: Incorrect Returns, Accounts etc: Outline

This guidance applies to returns with a filing date on or before 31 March 2009.

Guidance for returns and other documents with a filing date on or after 1 April 2009, where the return relates to a tax period beginning on or after 1 April 2008, is contained in CH80000+.



FA98/SCH18/PARA 20

FA98/SCH18/PARA 89

The legislation is similarly worded and applies where a person fraudulently or negligently EM5100+ delivers

  • an incorrect return
  • an incorrect statement or declaration in connection with a claim for any allowance, deduction or relief
  • incorrect accounts.

In each case we base the penalty on a maximum equal to the difference between

  • the amount of tax (and NIC) correctly payable for the relevant year(s) of assessment or accounting period by the person making the incorrect return etc including tax deducted at source and not repayable, and
  • the amount which would be so payable on the basis of the incorrect return etc.

Few problems arise in calculating the “tax difference” where the enquiry is into a business return. But difficulties can arise where the enquiry is into a return showing tax deducted at source and where a repayment has been claimed. This is because S95(2) defines the “tax difference” by reference to the amount payable and it could be argued that, in those cases involving repayments, the amount of tax payable is nil. This could result in a nil “tax difference” and no S95 penalty despite the fact that an incorrect return had been submitted fraudulently or negligently.

In cases involving repayments you should calculate the “tax difference” on the basis that a repayment represents a negative amount of tax payable. The impact of this is best illustrated by reference to the following examples:

Example 1

  Amount Returned Amount after Enquiry
IT/CGT due after allowances/relief Nil Nil
Less Tax deducted at source 350,000 50,000
Amount due (repayable) (350,000) (50,000)
Tax Difference  =  300,000    

Example 2

  Amount Returned Amount after Enquiry
IT/CGT due after allowances/relief 10,000 10,000
Less Tax deducted at source 15,000 5,000
Amount due (repayable) (5,000) 5,000
Tax Difference  =  10,000    

Example 3

  Amount Returned Amount after Enquiry
IT/CGT due after allowances/relief 10,000 15,000
Less Tax deducted at source 18,000 18,000
Amount due (repayable) (8,000) (3,000)
Tax Difference  =  5,000    

A return made for Income Tax purposes is to be regarded as made also for Class 4 NIC purposes.

You will still be concerned with non-statutory forms such as R40 or 32. It may be possible to argue that such a return is ‘of a kind’ mentioned in Section 8 etc and is ‘for the purpose of establishing the amounts in which a person is chargeable’ but it will normally be easier to deal with such an incorrect return under Section 95(1)(b).

If ITSA surcharge has already been imposed on the culpable duties, then it will have to be discharged and any amounts already paid (including interest thereon) will be repayable or available for set-off EM4103.

The offence is committed at the date when the return etc. is delivered. For a return, this will be the date on which it is logged. For claims etc you may well have to rely on the date the claim etc. was signed.

For companies penalties can arise in connection with incorrect research and development claims, land remediation tax credits or vaccine research (FA98/Sch 18/Paras 83F, 83L and 83M).